New leases created from 30 June 2022 onwards, or 1 April 2023 for retirement properties, will have a zero ground rent.
Ground rent is a staple of leasehold properties. In recent years the levels of ground rent charged has been the subject of much attention. However, changes are afoot: the Leasehold Reform (Ground Rent) Act 2022 comes into force on 30 June 2022, reducing ground rent to nothing.
The old way
Until now landlords have been able to set the amount of ground rent payable as they see fit, and include provisions in the lease for the ground rent to increase periodically, for example using a formula in line with RPI or doubling every 10, 15, or 20 years. Ground rent review provisions provides uncertainty for clients where the rent increases in line with RPI or can pose as a looming prospect if the ground rent doubles after a set number of years.
Recently the ground rent reserved in a lease has been an area of concern to mortgage lenders as their awareness has increased in relation to the implications of the Housing Act 1988 if ground rent exceeds £250 per year (or £1,000 per year in London). Mortgage Lenders’ increased awareness has led to higher costs in conveyancing transactions where a lender’s requirements have resulted in deeds of variation to amend the rent payable or an indemnity policy to protect their interest.
When it comes into force on 30 June 2022 the Leasehold Reform (Ground Rent) Act 2022 (“the Act”) will apply to all new leases, with a few exceptions. The Act prohibits landlords from charging a ground rent more than one peppercorn per year.
The Act also bans landlords from charging administration fees for the collection of the new ground rent.
Any landlords who contravene the Act can be fined up to £30,000 and landlords who collect a prohibited ground rent are required to repay it within 28 days.
As with most new laws there are some exceptions, which in this case include:
- Retirement properties: the Act will apply to these properties but not until at least 1 April 2023
- Community-led housing, for example shared ownership properties: the ground rent payable on the tenant’s share must be one peppercorn, but the landlord can charge a specified rent on their share
- Some financial products for example home finance plan leases
- Business leases with a dwelling: where the dwelling contributes substantially to the business premises
- Statutory Lease Extensions are not covered by the Act
There will of course be a period of transition as it will be a few years before the new leases with zero ground rent become the norm.
The ground rent in existing leases will remain the same unless and until the leaseholder extends the term. If the leaseholder extends the term using the statutory route the ground rent will become one peppercorn under the act. If the lease is extended voluntarily then the existing ground rent shall remain for the rest of the original term, with the ground rent of one peppercorn applying for the extended period. If a lease is surrendered and then re-granted, the Act will apply and the ground rent must be one peppercorn.
Zero ground rent in new leases will drastically reduce, in the majority of cases, the outgoings of a leasehold property owner. Service charges will continue to apply, but these cannot be inflated by administration charges for landlords trying to recuperate some of their lost income. The Act specifically prevents a landlord from requesting such a payment.
Leasehold property owners will have more certainty of the costs involved and won’t have to worry about the ground rent provisions being acceptable to a new buyer or their lender. The costs and discussions surrounding ground rent during a conveyancing transaction should also reduce as the requirement for a Deed of Variation or an indemnity policy to deal with rising ground rent fall away.
As the first step in the government’s reform of leasehold properties the Act looks to start redressing the balance and forms part of the most significant changes to property law for a generation.
At Gardner Leader we deal with leasehold property on a daily basis. If you are looking to buy or sell leasehold property then our residential property team will be happy to help. Our real estate team are experts in statutory lease extensions and our residential property team can assist with the transaction of a voluntary lease extension once terms have been agreed.