Lease extension solicitors, Holmes & Hills, discuss the Leasehold Reform (Ground Rent) Bill.
Following on from the Government’s Press Release issued in January 2021 regarding Leasehold Reform (which we discussed in an article here; on 12th May 2021 in the Queens’s Speech at the Opening of Parliament, the Leasehold Reform (Ground Rent) Bill (the Bill) was introduced.
This is the first piece of leasehold reform legislation designed to tackle the controversial issue of ground rents. The Bill attempts to bring forward one of the recommendations made by the Law Commission following their years of work and several reports.
The contents of the Bill and therefore this article are subject to change as the Bill passes through the legislative process.
The Bill will prohibit freeholders (or their agents) from granting new ‘regulated’ leases which demand a ground rent to be paid. i.e., “leaseholders of new, long residential leases (defined as a lease longer than 21 years when granted) cannot be charged a financial ground rent without a tangible service” attached to this fee. The new legislation will not have a retrospective effect and will only apply to new leases granted on or after the date the legislation comes into effect. However, the legislation will not apply to leases granted after the date the legislation comes into force where the lease arises out of a contract (i.e. sales contract) entered into prior to the legislation commencement date.
Business leases – including a dwelling (residence) where the use of the premises as a dwelling materially contributes to the business.
Statutory lease extensions of a house or flat. Leaseholders that extended their lease on a flat via the statutory process will already only pay a peppercorn ground rent in respect of the entire term of the new (extended) lease. Leaseholders that have extended their lease on a leasehold house will pay a modern ground rent.
Retirement properties – previously expected to be excluded from any forthcoming legislation concerning banning of ground rents, retirement properties will now only be excluded until 31st March 2023 (under current drafting), following which new leases on retirement properties will come under the remit of the new proposed legislation.
Community housing leases – where the freeholder is a community land trust or the lease is within a building managed or controlled by a co-operative society.
Under The Bill, a leaseholder with a shared ownership lease granted after the legislation commencement date could not be charged a ground rent by the freeholder in respect of the percentage share of the property the leaseholder owns. However, the freeholder will still be able to charge a ground rent on the percentage share owned by the freeholder.
The legislation will apply to leases created as a result of a deemed surrender and regrant, such as in situations where there is variation to demise or term of the lease, for example.
The effect on the leaseholder will be that any new leases granted on or following the date the legislation comes into force will only be able to stipulate a peppercorn ground rent (£nil) for the term of the lease beyond the original term.
In respect of voluntary (non-statutory) lease extensions, under the drafting of the Leasehold Reform (Ground Rent) Bill as introduced to the House of Lords, a new (extended) lease granted after the date the legislation comes into force by way of a non-statutory procedure would still be able to charge a ground rent for the duration of the term of the existing lease, but ground rent for the additional term must be a peppercorn (£nil). Any ground rent that remains for the period of the previously existing term must not exceed the ground rent under the terms of the previous lease.
Many housebuilders have, in recent years, stopped selling leasehold houses and stopped selling leasehold flats with ground rents, expecting legislation to come into force at some point in the future. The Leasehold Reform (Ground Rent) Bill does not introduce prohibition of selling leasehold houses but the removal of the ability to charge a ground rent removes much of the financial argument for selling houses as a leasehold title.
Leaseholders already looking into or already embarking on the process of extending their lease (on their flat) can already extend their lease and reduce their ground rent for the entirety of the term of their new (extended) lease to a peppercorn.
In this respect then, the legislation is cementing and formalising the current position, whilst eradicating the ability of any housebuilders who continue to sell leasehold properties with ground rent from doing so.
Where the Leasehold Reform (Ground Rent) Bill does change leaseholders options is in respect of non-statutory lease extensions. In some instances voluntary (non-statutory) lease extensions provide leaseholders a means of extending their lease for a lower up front (short-term) cost, by agreeing with the freeholder to maintain current ground rent provisions, or to potentially increase them, instead of reducing them to a peppercorn (£nil). Situations in which a leaseholder may wish to do this include where a leaseholder wishes to extend their lease purely to facilitate a sale. The new legislation does seem to limit the ability to minimise short-term Premium costs in this way, although the ability to maintain ground rent payments for the period of the existing term may preserve this to some degree in some cases.
If a leaseholder is charged a “prohibited rent” by the Freeholder, intentionally or otherwise, leaseholders have the right to apply to the First Tier Tribunal to recover any monies they may have paid which were not permitted to be charged by the legislation.
If a freeholder fails to comply with the new legislation and collects a “prohibitive ground rent” they must refund any such payment, or they may face a fine of between £500-£5,000, which will be levied by the local authority.
It cannot currently be said what the exact final wording and therefore impact of the legislation will be, or when it will come into force.
The Leasehold Reform (Ground Rent) Bill, as the name suggests, focuses on the issue of ground rents and does not deal with the many other leasehold reform matters and recommendations raised and highlighted by the Law Commission in their work over preceding years. Therefore, the Bill does not deal with the matters of marriage value, the increase of the additional statutory term to be provided to leaseholders when extending a lease (from 90 years to a recommended 990), the granting of a statutory right to vary leases to remove ground rent without extending a lease, the calculation of the premium or the broadening of the criteria for leaseholders to qualify for statutory rights, to name just a few.