Recent Legal Changes Affecting Ground Rents

Please note that this News item is not maintained, and reflects the law as at the date of publication or update.

Background

On 30 June 2022 the Leasehold Reform (Ground Rent) Act 2022 (‘the Act’) was brought into force. This Act saw a change to ground rent rules in relation to ‘new leases’ and will affect many lessees of new long leasehold properties and existing leasehold properties in the future.

The Act was long awaited and has signaled the start of proposed major leasehold reform in years to come. The intention of Government is to make leaseholds fairer and more transparent to owners in the future.

A ground rent is a term given to a payment that is payable under a lease by a lessee to a landlord. The sum payable is usually specified in a lease as an annual rent and can range from the payment of a token such as a peppercorn to a specified sum of money.

Historically ground rents have been reserved by landlords to preserve an element of value to their freehold interest. it can be considered that ground rent, however minimal, is a payment which the landlord takes advantage of to compensate them for the loss of the Property whilst demised to the lessee. The rent is not attached to the provision of any service and is a pure benefit to the landlord.

Prior to the Act landlords could set a ground rent at any level. Of course, a lessee would be advised against paying a high premium for a leasehold property that retained a high ground rent due to a possible double payment and the effect this may have on resale in the future. Some lenders set restrictions on their lending on leasehold properties where ground rents were unusually high and where they could be seen to be a burden on any owner. This helped govern an appropriate level of ground rent in the industry but did not restrict the landlord as such.

There has been a large amount of press coverage in recent years concerning the level of ground rents especially in relation to new properties. The focus on rising ground rents that increase over the period of lease terms have been discouraged and deemed unfair. However, the Act has cemented the overriding opinion that ground rents are not favoured in leases.

The Act means that, on the whole, any new lease that is granted in relation to a new build, existing property or a lease extension must be granted with a ground rent which must not exceed a peppercorn ground rent per annum. There is no obligation on a landlord to charge or collect a peppercorn rent and therefore it is anticipated that landlords will not request lessees to pay the rent in practice.

Which leases will the Act affect?

Generally, a lease will be regulated by the Act where:

  • It is granted on or after 30 June 2022
  • It is a long lease (exceeding 21 years) for a single dwelling
  • It was granted for a premium or where the lease is extended in term (whether or not for a premium).

The Act does not apply to Business leases.

What if I entered into a lease with a ground rent of more than a peppercorn after 30 June 2022?

If the lease has incorrectly reserved a ground rent, then it is advisable to speak to the landlord and request that this is altered. Although a formal document is not required to make this alteration it is advisable to seek a formal deed of variation. The landlord should not seek a premium for the amendment to the rent in so far as this was not a regulated rent in any event.

If you are the landlord and have been collecting the ground rent incorrectly in relation to the new lease then any rent should be returned to the lessee within 28 days of receipt. If you continue to collect rent then enforcement action could be taken against you and a fine could be issued.

What if I entered into a lease extension of my existing Property after 30 June 2022 and the new lease reserved a ground rent of more than a peppercorn?

Where a statutory lease extension was entered into your ground rent would be reduced to a peppercorn from completion in any event. However, if a lease extension was negotiated with the landlord then the ground rent may have been retained.

The Act allows ground rent to stay at the existing rent for the remainder of the existing term. Any extended term must benefit from a peppercorn ground rent.

Therefore, a rent may be retained depending on what was negotiated and will be permitted under the Act.

Conclusion

The issue of ground rent is an important consideration for both the landlord and lessee when taking a new lease or extending a lease and it is essential that all parties are aware of the Act and their rights.

If you are looking at purchasing a new lease or taking a lease extension of an existing property, then obtaining specialist advice is imperative.

For more information on this topic, please contact Melanie Verth.

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