The Queen’s Speech 2021, delivered on 11 May at the opening of Parliament, promised a commitment by the Government “to help more people to own their own home whilst enhancing the rights of those who rent.” Among the measures the Government said it was working on included the Leasehold Reform (Ground Rent) Bill, a law to end the practice of charging ground rents for new leasehold properties in England and Wales. This bill was published on 13 May.
According to the Government, the purpose of the Leasehold Reform (Ground Rent) Bill is to “ensure leaseholders of new, long residential leases cannot be charged a financial ground rent for no tangible Service.”
What the bill means
Under the proposed law, those who have bought the right to live in their property for a long period of time (over 21 years), or leaseholders who have been granted the ability to renew in perpetuity, will not be required to pay the landlord ground rent. To enforce this, a civil penalty regime will mean freeholders who charge ground rent in contravention of the bill could face fines of between £500 and £5,000.
In part, the bill responds to recent concerns over increasing ground rents and a lack of transparency for homeowners regarding the liabilities they face. In June 2019, the Government asked the Competition and Markets Authority (CMA) to conduct an investigation into potential mis-selling in the leasehold sector, and in March 2021, the CMA sent consultation letters to two housing developers in relation to possible breaches of consumer protection law such as terms that double ground rent every 10 or 15 years.
Exceptions to the law
There are selected exceptions to the ground rent ban. These include parts of the community-led housing sector, allowing them to charge ground rent to maintain their ability to promote further community development and activities. Certain financial products where rent replaces interest-bearing mortgage payments will also be exempt, such as those in the Islamic finance sector, where Sharia law forbids the charging of interest. Freeholders for certain business leases will be exempt if the leaseholders need to live in the same premises as their workplace so that they can agree on the most beneficial and appropriate terms.
How will leaseholders be affected?
The law will stop leaseholders for new leases from being charged ground rent, but there is a question over where this leaves existing leaseholders. As the bill continues to be examined in the House of Lords, members have raised concerns over a lack of help for this category of homeowners. They have put forward amendments to allow leaseholders to buy out the ground rent without extending the lease. These could be added to the current bill or put into motion through a different bill in the future. Others have suggested that retirement housing should be exempted from the ban so that developers can use ground rent to fund the extra cost of communal facilities.
The bill forms part of an overall push from the Government to reform the leasehold system, improve transparency and provide better value for leaseholders after a July 2020 Law Commission report identified a number of problems with its approach to home ownership. This effort includes the changes announced in January 2021 to allow leaseholders to extend their leases to 990 years without paying ground rent and the formation of the Commonhold Council in May 2021 to advise on how to increase the uptake of commonhold. The future of leasehold depends on how the Government views the changes put forward by the Commission and the Council. They could choose to ban leasehold entirely and replace it with commonhold or simply incentivise the adoption of commonhold so that it can be used alongside leasehold as an alternative system of ownership.
What’s next for the Leasehold Reform (Ground Rent) Bill?
The bill is currently being examined by members of the House of Lords to decide whether any amendments should be made. The many stages it must pass through before becoming law provide plenty of opportunity for changes that could broaden its scope to include existing leaseholders or increase its range of exceptions. You can keep track of the bill’s passage by heading to its page on the UK Parliament website.
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