On 7 February 2022, the Leasehold Reform (Ground Rent) Act was passed by the UK Government. Part of a package of measures the Government has referred to as “the biggest reforms to English property law for 40 years”, the Act effectively abolishes ground rent for new long residential leases in England and Wales. Such a shake-up to the market will affect millions of leaseholders and, in turn, their managing agents and landlords.
What is leasehold reform, and why is the Government interested?
The Government has long been interested in making property ownership more accessible. As part of its 13th Programme of Law Reform, the Law Commission decided the purchase of a freehold or extension of a lease should be “easier, faster, fairer and cheaper.”
It published proposals for doing this on 19 July 2018, followed by reports on leasehold ownership on 9 January 2020 and 21 July 2020. From these, then Secretary of State Robert Jenrick announced on 11 January 2021 that two pieces of legislation would tackle leasehold reform. The Leasehold Reform (Ground Rent) Bill was introduced in the House of Lords on 12 May 2021. An amendment to the Bill to ban ground rent for existing leases was introduced on 26 January but roundly defeated.
Why are they targeting ground rent?
When a leaseholder takes on a long-term lease (over 21 years) for a house or flat, they normally pay the freeholder ground rent. This amount is normally quite small compared to the value of the property, particularly because in older properties, the amount does not take inflation into account. Newer developers have been profiting from higher ground rents that increase throughout the course of the lease. The Government thinks this is unfair to the leaseholder as it increases the costs required to extend the lease or purchase the freehold for a property, as well as making it more difficult to sell.
How does the Act apply?
The Act applies only to new long leases of 21 years and above. It effectively abolishes ground rent for these leases by restricting them to ‘a peppercorn’, a legal term meaning zero financial value. It also bars the payment of admin fees in relation to ground rent.
A landlord or developer caught contravening the Act and charging ground rent could be subject to a civil penalty of up to £30,000, enforced by local authorities and Trading Standards. Leaseholders who have been unlawfully charged ground rents will be able to recover them through a tribunal.
There are some exceptions. Not covered by the Act are business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases.
Where does the Act leave leaseholders?
While the Act is good news to those taking on new leases, the defeat of the amendment means those in current leases must continue to pay ground rent. A property lease that requires ground rent will be less desirable than one that doesn’t, making it more difficult to sell and mortgage. The outcry from figures in the property industry and MPs may lead to a second bill in the future to address this concern. In 2019, the Government created the Public Pledge for Leaseholders. This featured a number of promises for freeholder signatories, including a pledge to contact any leaseholders with leases that double ground rent more frequently than every twenty years and offer to amend them for something more reasonable. The guidance, though voluntary, was signed by 63 different industry bodies and developers.
How will block managers be affected?
If your block management services include collecting ground rent on a landlord’s behalf, you must ensure that the landlord stays within the law, or they could face penalties. It is vital to communicate with all parties involved—landlords and residents—to inform them how this law will affect them. Be ready to answer any questions from residents in current leases who are thinking about extending or negotiating their lease. Those in long leases may also have questions about why they must continue to pay ground rent.
When will the Act come into force?
Though the Act was passed on 7 February 2022, different parts will come into force at different times. Lord Greenhalgh, the Government minister responsible for leasehold reform, has committed for the Act to commence within six months of the date it was passed. Provisions for retirement home leases will apply later, after 1 April 2023. This is intended to give the sector additional time to transition.
The bottom line is that block managers need to be transparent to their leaseholders about how they will be affected. Ensure communication stays open and that they feel free to come to you with any questions they may have.
For more information on the Leasehold Reform (Ground Rent) Act and other legal updates that could affect block managers, catch up on this free webinar, Quarterly Legal and Compliance Updates for Block Managers 2022 Q1, featuring Cassandra Zanelli, Solicitor and CEO of Property Management Legal Services and Fixflo’s CEO, Rajeev Nayyar.
