The Leasehold Reform (Ground Rent) Bill receives Royal Assent: March 2022 update

As the first stage in the Government’s commitment to widespread leasehold reform, The Leasehold Reform (Ground Rent) Act 2022, (the “Act”), has now been passed.

The majority of the Act remains as initially introduced to the House of Lords, with some changes to provide additional clarity as a result of the parliamentary review process. Our Leasehold Reform update provides you with a quick overview of the key areas of the Act.

What impact will the Leasehold Reform (Ground Rent) Bill have?

The Act will (when it comes fully into force) limit the ground rent chargeable on ‘Regulated Leases’ (essentially most new long leases) to a peppercorn per year, effectively restricting ground rents being charged unless at zero financial value. It will also prohibit freeholders from charging administration fees for collecting a peppercorn rent. This is the first of a two-part seminal legislation to reform the leasehold system.

On 8 February 2022, the Leasehold Reform (Ground Rent) Bill received Royal Assent.

Which leases are affected?

Subject to certain exceptions, the ground rent restrictions will apply to leases of dwellings granted on or after commencement of the Act. Certain types of leases are excluded from the ground rent restrictions, such as business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases.

This means that any contracts exchanged on or after that date must not require the grant of a lease with a ground rent

When will it come into effect?

The Act has not been fully come into force because time is needed to prepare regulations. Government Minister Lord Greenhalgh has given a commitment that it will be fully commenced within six months of Royal Assent (except in relation to retirement home leases) i.e. before 8 August 2022.

What if contracts granting a lease have already exchanged?

There will be an exemption where contracts have already been exchanged up and when the Act comes into force (unless pursuant to an option or right of first refusal).

Therefore, any contracts exchanged in that time requiring a lease to be granted after the Act has come into force can contain a ground rent. However, this could deter buyers from exchanging and requesting to wait until the Act comes into force.

Rules for shared ownership leases, retirement properties and voluntary lease extensions.

Special rules apply to leases that “replace” leases granted prior to the Act (such as voluntary lease extensions). If a voluntary lease extension is granted, the Act will only bite on expiry of the original term (even where there is a deemed surrender and regrant due to a change in the demise of the lease).

The Act will apply to new shared ownership leases where a tenant has not yet purchased 100% of the property. Landlords will be able to demand ground rent on their share of the property but only a peppercorn rent can be demanded on the tenant’s share of the property.

For retirement properties, the Act’s provisions must commence no earlier than 1 April 2023. This is intended to give the retirement sector, where ground rents are often used to help fund the additional costs of providing communal spaces and facilities, additional time for transition.

What does this mean for Developers?

Developers should expect it to become the norm for plot buyers’ lawyers to demand a peppercorn ground rent, even if the Act hasn’t yet come into force. You may want to consider whether you decide to change all plot leases to a peppercorn ground rent in anticipation of the Act.

Developers will need to review any pre exchanged contracts to sell freeholds interests a third party and the impact of the legislative change on the reduction in rent on the price.

Developers should consider how they will dispose of their freehold interest in land now that there is no financial value in ground rent and how to implement a successful exit strategy. This could include setting up Resident Management Companies and transferring the freehold to that company once all the plots on the development have sold.

A breach of the ground rent restriction will be a civil offence for which enforcement authorities can impose a financial penalty of between £500 and £30,000.

As yet, the Government has not announced when the Act and its provisions will apply retrospectively i.e. reducing the ground rent on those leases already granted.