Landlords’ guide to forthcoming ground rent rule changes

By the summer of 2022, new rules are expected to have come into force in England and Wales which will effectively ban ground rent being charged on most new, long residential leases and which could leave landlords who ignore the rules susceptible to hefty fines.

The rules are being introduced by the Leasehold Reform (Ground Rent) Act, and as Daniel Ginsbury, a senior partner in our property team explains: ‘while many of the provisions are clear-cut and should be easy to apply, there are some rules that are likely to be more difficult to navigate and which could therefore put landlords at risk of committing an unintended breach.’

To mitigate the chances of this happening, we are advising all commercial clients who are intent on selling residential properties by granting long leases in the coming months, to contact us to discuss the proposed ground rent structures. Not only will this ensure that your lease arrangements are compliant with the Act when it comes into force, it will also give you the chance to structure any pending deals in a way that is outside of the Act in those circumstances where this is legally permissible and commercially desirable.

While many of the provisions are clear-cut and should be easy to apply, there are some rules that are likely to be more difficult to navigate.

When will the Act come into force?

We do not yet know when the Act will come into effect. However, it received Royal Assent on 8 February 2022 and an indication was given at that time that most of the provisions would be in force within the following six months, i.e., by August 2022, and it is possible that this could occur  even sooner.

What are the main changes?

The provision that has attracted the most attention is the new rule which restricts the ground rent that can be charged on most long residential leases, created on or after the date the Act commences, to a single peppercorn each year. This effectively prevents the imposition of ground rent charges in many circumstances.

Related to this is the corresponding ban on levying any administrative charges in relation to the collection of any peppercorn rent.

What types of leases are affected?

The Act will apply to any residential lease which:

  • is entered on or after the date the Act comes into force (unless pursuant to a contract which precedes the date on which the Act comes into force);
  • is granted for a term of more than 21 years; and
  • requires the payment of a premium.

The Act will not apply to:

  • statutory lease extensions;
  • community housing leases;
  • home finance plan leases; and
  • arrangements that can properly be classed as a business lease.

Rules in respect of voluntary lease extensions

Unlike statutory lease extensions, the Act will catch voluntary lease extensions but only from the date on which the original lease term expires.

Rules in respect of shared ownership properties

Shared ownership arrangements are also covered under the Act in those cases where the tenant has not yet purchased 100 per cent of the property they occupy. However, the rules provide that while only a peppercorn rent can be demanded on the tenant’s share of the property, landlords remain able to demand normal ground rent payment on their share.

Rules in respect of retirement properties

Leases in respect of retirement properties are also caught by the Act, but to give owners and operators in this sector more time to prepare for the loss of ground rent charges – which are often used to provide valuable communal spaces and facilities – the provisions of the Act will not come into force for retirement leases until 1 April 2023.

Rules where a pre-commencement lease is varied

Where a lease is granted before the Act comes into force, but is then varied after that date in such a way that it results in a deemed surrender and re-grant, the new arrangement will be caught by the Act and accordingly future ground rent charges prohibited. This will be the case even where the surrender and re-grant does not trigger the need for a premium to be paid.

Who will enforce the Act and what are the penalties for non-compliance?

The Act will be enforced by Trading Standards offices which have the power to issue fines of between £500 to £30,000 in any case where ground rent has been unlawfully demanded or where a payment in respect of the same has been received and not refunded within 28 days.

There is also the possibility that a tenant who has been charged ground rent in breach of the rules may issue legal proceedings in the First-Tier Tribunal to recover any monies they are owed, together with interest and costs.

How we can help you to get ready

By contacting one of our property solicitors to discuss your ground rent proposals , you can avail yourself of a review of your current lease arrangements, and we can advise you on the steps that you need to take now to avoid falling foul of the new rules. This may include:

  • updating your current lease agreements;
  • introducing new policies and procedures – for example, on what to do where a prohibited ground rent charge is inadvertently made once the new Act has come into force; and
  • providing appropriate staff training.

We can also advise you on the approach to be taken to lease agreements that have the potential to be kept outside of the new regime, but which could quite easily be caught by the Act if the deal is not structured appropriately. This includes pending leases, where the date for exchange of contracts has not yet been agreed but  which may be kept outside of the new regime if a date for exchange can be fixed before the Act comes into effect.

We can also provide specialist advice on the impact of the new rules where you are the lessee under a head lease which covers multiple properties, because in this scenario the head lease will not be caught by the new rules, but any subleases you may intend to grant out of it, could be.

To find out more, please give Daniel a call on 020 7845 7400.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.