No more ground rent … for new leases and no ground rent in any extended lease term
So, we were all wondering when the 2022 Act banning ground rent for new leases would come into force and now we have the answer.
This is a pretty big piece of Leasehold Reform News and I am delighted to be able to announce it here.
Yesterday I received a letter from The Minister, Lord Greehlalgh confirming that the Leasehold Reform Ground Rent Act 2022 will come into force on 30th June 2022.
The 2022 Act prevents any new lease granted after 30th June 2022 containing a ground rent. The only acceptable rent after this date will be a peppercorn – I.e. zero, nothing, nil.
The only exception to this will be that if a lease is renewed on a voluntary (agreed) basis that the existing ground rent may continue during what would have been the term of the old lease. In the ‘new’ or extended part of the lease term the ground rent must be zero.
Leases granted after 30th June 2022 that breach these provisions will expose the person granting them to penalties and fines of between £500 and £30,000 will be enforced by a civil penalty regime.
Any rent paid in error after commencement must be returned with interest and there are anti-avoidance provisions in the Act preventing freeholders form charging an administration fee to collect a ‘peppercorn’ ground rent.
There are some very limited exceptions which relate to community housing, business leases, certain types of financial products and shared ownership. In addition, commencement is delayed until a date which will not be before 1st April 2023 for the retirement sector.
The writing is therefore very much on the wall for ground rent.
Comment
This will delight leasehold campaigners who have been looking for the abolition of ground rent (and leasehold more genearlly for residential flats) and paves the way for a world in which new leases are at zero rent. That surely also forms part of the commonhold agenda as with freehold flats under commonhold there will be no more ground rent.
I expect that there will be lots of landlords caught out by these changes who do not react quickly enough and there may well be fines for those that get it wrong.
It will be intersesting to see what this does to the value of portfolios with a ground rent as given that the scope for introducing these in the future will diminish, this could see an indirect increase in their value .
We will also have to wait and see what else DLUHC may have planned in terms of the wider scope for reform.
So, we were all wondering when the 2022 Act banning ground rent for new leases would come into force and now we have the answer.
This is a pretty big piece of Leasehold Reform News and I am delighted to be able to announce it here.
Yesterday I received a letter from The Minister, Lord Greehlalgh confirming that the Leasehold Reform Ground Rent Act 2022 will come into force on 30th June 2022.
The 2022 Act prevents any new lease granted after 30th June 2022 containing a ground rent. The only acceptable rent after this date will be a peppercorn – I.e. zero, nothing, nil.
The only exception to this will be that if a lease is renewed on a voluntary (agreed) basis that the existing ground rent may continue during what would have been the term of the old lease. In the ‘new’ or extended part of the lease term the ground rent must be zero.
Leases granted after 30th June 2022 that breach these provisions will expose the person granting them to penalties and fines of between £500 and £30,000 will be enforced by a civil penalty regime.
Any rent paid in error after commencement must be returned with interest and there are anti-avoidance provisions in the Act preventing freeholders form charging an administration fee to collect a ‘peppercorn’ ground rent.
There are some very limited exceptions which relate to community housing, business leases, certain types of financial products and shared ownership. In addition, commencement is delayed until a date which will not be before 1st April 2023 for the retirement sector.
The writing is therefore very much on the wall for ground rent.
Comment
This will delight leasehold campaigners who have been looking for the abolition of ground rent (and leasehold more genearlly for residential flats) and paves the way for a world in which new leases are at zero rent. That surely also forms part of the commonhold agenda as with freehold flats under commonhold there will be no more ground rent.
I expect that there will be lots of landlords caught out by these changes who do not react quickly enough and there may well be fines for those that get it wrong.
It will be intersesting to see what this does to the value of portfolios with a ground rent as given that the scope for introducing these in the future will diminish, this could see an indirect increase in their value .
We will also have to wait and see what else DLUHC may have planned in terms of the wider scope for reform.
Now this really is a piece of leasehold reform news.
The Leasehold Reform (Ground Rent) Bill received the Royal Assent on 8th February 2022, making it an Act of Parliament.
Is it in force? – no not yet
The new Act, (which is not in force yet) will apply to leasehold properties in England and Wales. It will restrict ground rent owed on new leases to a ‘peppercorn’ rent – effectively zero – and aims to make leasehold ownership “fairer and more affordable”.
When will the new act come into force?
The accompanying DLUHC press release gives a commitment to bring the main provisions of the Act into force within 6 months, in other words by 8th August of this year.
There is a carve out for the retirement sector who have until April 2023 to get used to the idea of leases without ground rents on the basis that in some retirement developments a ground rent is used to suppress the maintenance costs and reduce the service charge.
If I buy a new flat once the act is in force will I pay a ground rent?
There will be no ground rent for brand new leases (eg. New builds)
The one short term exception will be where a contract to grant the lease was granted before the Act comes into force. We might expect therefore to see some leases validly granted with a ground rent for a little while after commencement, but only under this exception.
Once in force the Act will effectively ban ground rent for all brand new leases.
In other words, any lease of a newly built flat or house will have to be at a zero rent.
The Act also contains deeming provisions so that even if a new lease is drafted with a ground rent during what is called the ‘prohibited period’ (essentially the extended term of any new lease) that the rent will be deemed to be zero, even if the lease says otherwise.
So, when a lease can have a ground rent? – On renewal by agreement – but only in the old lease term
Section 6 of the Act permits a new lease that is granted by way of renewal or extension on a voluntary basis to keep a ground rent but then only during the old lease term and at the old rent.
This will have a big impact on those freeholders who like to keep a ground rent on any voluntary extension of a new lease. All that will be permitted now is to keep the old ground rent (whatever this was) until the date on which the old lease term would have expired.
What does this mean in practice?
To give an example: if a lease has a term of 99 years from 1980 and expires 2079, then if a deal is done to extend that lease by another 100 years so that it runs out in 2179, then the new lease can keep the old ground rent (whatever that was) until 2079, but after that any new rent must be zero.
In addition, the old rent cannot be increased and must remain exactly as it was under the old lease.
What about other extensions?
Any extension under statute will be at a zero rent in any event, as this is what the 1993 Act prescribes and the Act makes plain that this type of extension is a ‘permitted extension.
There are exemptions for ‘Islamic finance’ type arrangements and also ‘shared ownership’ leases under which the tenant’s proportion must be at zero rent but that the landlord / housing provider may charge whatever rent they would normally charge in respect of the rental element.
What if a landlord doesn’t comply?
The act is quite specific that the local authority weights and measures department has responsibility for enforcement and that fines can be imposed. The minimum fine is £500 and the maximum £30,000.
In addition, if a ground rent is collected when it shouldn’t be once the act is in force then the rent must be repaid to the leaseholder with interest. An example would be if a new lease is erroneously granted with a rent provision in the extended lease term – or at a rent that exceeds the old rent.
What will be the impact of the Act?
In an earlier version, the Act included an obligation to inform the tenant about the existence of the Act and its provisions. These provisions did not make it into the final version Act
However, the very existence of the Act itself, once in force, will surely push more leaseholders to ask for a lease at a zero rent on extension and / or go down the route of a statutory extension if this is not offered.
All this means that the writing really is on the wall for ground rent.
Commentary
Once in force, this Act will be a big step forward towards the government’s proposed agenda for change in this area.
Ending ground rent for newly built leasehold flats and houses will go a long way towards avoiding any repeat of the so called ‘leasehold scandal’ where doubling of ground rents on newly-created leases created an iniquitous situation for homeowners who had been sold leasehold houses with an escalating ground rent.
However, this Act does not deal with the banning of the use leasehold on an ‘unnecessary’ basis as a tenure for houses, as was originally promised by the then housing minister Sajid Javid. That question together with the prospect of wider reform is still ‘in discussion’ and it remains to be seen how and when such further changes will be acted upon by government.
This is of course all part of a wider programme to make leasehold unattractive for new properties and eventually, to pave the way for commonhold for new properties.
Although the new law will abolish ground rents on new build leases and during any extended lease term, it does not affect existing leaseholders.
Leaseholders who face high ground rents and want to get rid of them will still need to follow the statutory leasehold enfranchisement process.
I look forward to seeing what the further detail of the governments plans will be on the topic of broader leasehold reform, which we may expect later in this Parliament.
A change to the threshold for non-residential premises in enfranchisement and the prospect of mandatory leasebacks – Both in consultation as of 11th January 2022.
Consultation announced 11th January 2022 – closes 22 February 2022 – make your views known !
Following on from the Law Commission’s work on this and hot on the heels of last January’s announcement that MHCLG (now DLUHC) was looking to consult on the proposed reforms to make it ‘cheaper and easier’ to enfranchise we now have a new consultation – closing 22nd February 2022.
The consultation seeks views on the following proposals:
• The non-residential limit for collective enfranchisement;
• The non-residential limit for right to manage claims;
• A non-residential limit for individual freehold acquisitions;
• The introduction of mandatory leasebacks as part of collective freehold acquisitions;
• Commonhold voting rights in shared ownership properties; and
• The provision of information during the sale of a commonhold property.
So what do we think about all of these ?
There is quite a lot here, so I am going to focus first on the enfranchisement options, as after all this is very much ‘Leasehold Reform News.’ The big item is really the 25% rule as it might affect collectives.
The 25% threshold was discussed in the Law Commission’s work at some length – and for those whose buildings don’t qualify at the moment because more than 25% is used for ‘non-residential’ purposes this would be very good news – but, I am sure that there are plenty of buildings out there that have been specifically built with this limit in mind.
Developers, investors and pension funds may be less keen on losing the ‘jewel in the crown’ of their retail investment portfolio to an enfranchisement sub-committee – or indeed a rival investor who uses the legislation as a stalking horse to make this happen.
Don’t forget also that if you buy the freehold and there are no long leases in place of the retail units you would have to fund the purchase of these somehow. If you live in a flat over a ‘Bluewater’ like development this might cause something of a funding gap.
Unless, of course, the freeholder takes a ‘leaseback’ of these areas – meaning that you don’t have to fund these areas as the freeholder retains them on a long lease and you become their landlord. Well, at the moment that will only happen if the freeholder wants it to and many will say ‘no’ as they know that it will make the enfranchisement fail.
Mandatory leasebacks – and how this would fit with changing the 25% rule
But wait, what’s this? The consultation is proposing mandatory leasebacks – something of a ‘life hack’ for collectives ! If the freeholder had to take a leaseback then this will certainly make it ‘cheaper and easier’ as the cost (and value) in these areas stays with the freeholder.
Well, of course, if this did happen many many more blocks would be able to enfranchise and the debate would shift to the management issues that might arise in the after scenario.
So, what does all this this mean?
Well, if the law is reformed in this way, there will be a lot more enfranchisements in situations where this has not been possible before. Some of these will be quite complex mixed-use developments. If the requirement for mandatory leasebacks were introduced at the same time, then this would very much clear the pathway for a lot more collectively owned buildings, and, dare I say it, enfranchisement professionals will be kept very busy indeed.
