Losing ground: Robert Barham writes for EG on the Leasehold Reform (Ground Rents) Act 2022
Residential Property Partner, Robert Barham, has authored an article for Estates Gazette entitled 'Losing ground: inside the Act abolishing ground rents in new long resi leases'.
In his article, Robert looks in detail at the Leasehold Reform (Ground Rents) Act 2022 and the impact it will have on developers and landlords.
On 8 February the Leasehold Reform (Ground Rent) Act 2022 received royal assent. The main provisions of the Act are not yet in force, but the government has pledged to bring the Act into full effect within six months, that is by around the beginning of August.
The purpose of the Act is to outlaw the reservation of ground rents in new long leases of residential property.
The full article can be read here, behind the paywall and is published in full below.
On 8 February the Leasehold Reform (Ground Rent) Act 2022 received royal assent. The main provisions of the Act are not yet in force, but the government has pledged to bring the Act into full effect within six months, that is by around the beginning of August. The Act does not, however, abolish ground rents in residential leases retrospectively – a change that Labour had advocated.
What does the Act do?
The purpose of the Act is to outlaw the reservation of ground rents in new long leases of residential property. All such rents will be set to a peppercorn. This mirrors the provisions relating to an extension of leases granted under the Leasehold Reform, Housing and Urban Development Act 1993. When one considers that, it is perhaps surprising that it has taken parliament nearly 30 years to bring in the equivalent provision for leases granted on a voluntary basis.
The Act only applies to new leases granted after the commencement date, and of particular note is that it excludes leases granted after that date which are in pursuance of a contract entered into before the commencement date. Only leases of residential property that are for a term of more than 21 years from the date of grant are affected, thereby excluding shorter arrangements which might be termed “tenancies”. There are limited exceptions to this, including shared-ownership leases, and there is to be a delay in bringing in the parts of the Act that relate to retirement homes, which the government has agreed not to bring in until after 1 April 2023.
Interestingly, from a legal draftsman’s point of view, it seems that the practice of referring to the ground rent as a “peppercorn” is likely to continue. The Act specifically refers to a peppercorn rent being a “permitted rent”. One might have thought that the opportunity could have been taken to abolish ground rent wording from leases in its entirety, but it seems that that is not to be. References to peppercorn rents often leave foreign buyers bemused. For example, we were once given a box of peppercorns by a foreign buyer client to be passed to his new landlord so that he could never be accused of missing his rent.
There is no actual requirement in the Act for wording relating to the payment of ground rents to be excluded from leases, but clearly any wording will be void in so far as it reserves a rent above a peppercorn. The Act provides that it will be an offence to recover ground rent under such a provision, although there is a saving where ground rent is charged but returned within 28 days, presumably to prevent mistaken breaches. The Act puts the duty of enforcement on local weights and measures authorities, and fines of between £500 and £30,000 can be imposed for breaches. Any prohibited ground rent paid can be recovered by the tenant.
Responding to the new provisions
The Act was first published in May 2020, but the intention to bring in legislation to provide for the abolition of ground rents was known well before that. Some developers saw the writing on the wall a while ago and have already reduced rents to a peppercorn. Others, however – and perhaps the majority – continue to demand ground rents and seem to have taken no heed to the impending changes.
One reason for the fact that developers have not supported the idea that legislation was necessary in order to force their hands is presumably that the reservation of a ground rent makes very little, if any, difference to the price that can be charged for a new property. In theory, the right to receive a ground rent throughout the term of a lease has a relatively easily ascertainable value, yet that value does not seem to be taken into account when determining the market price.
In some developments the ground rent is £1,000 a year or more, which must have a capital value in the tens of thousands. In other words, landlords often receive a bonus through creating ground rents, which can be realised when the reversionary interest is sold following the sale of all units in the development. This will be lost. In theory, landlords would be compensated by higher premiums, but it seems unlikely that the market will see it like that.
Now that the writing is on the wall, developers will presumably launch new schemes with zero ground rents. This will avoid the situation where units sold early will reserve a ground rent but those sold after the commencement date of the Act will have no ground rent. However, there are plenty of schemes currently part-sold with ground rents reserved which are going to end up with some flats in the scheme paying ground rents and others not.
A proposed amendment to require landlords to inform prospective tenants of the pending abolition of ground rents prior to the commencement of the Act was not adopted by parliament. Nevertheless, it must be incumbent on solicitors and property advisers to inform their buyer clients of the existence of the legislation, with a view to negotiating ground rent provisions out of leases.
It is likely that the pressure on landlords to abandon ground rents will steadily mount as the commencement date draws nearer to the point at which they have no option once the law comes into effect.