Insight

Leasehold Reform (Ground Rent) Act 2022: Grounding Peppercorn rents in England and Wales

No ground rent for new long residential leases

The Leasehold Reform (Ground Rent Act) comes into force on 30th of June 2022 and incorporates some of the most significant changes in a generation. The most considerable being the ban of ground rents for new, qualifying long residential leasehold properties in England and Wales. A long lease is one with a term of 21 years or more. Historically ground rent has caused problems for many leaseholders especially in cases where these fees exponentially increase year by year, adding to the long list of additional or “hidden” fees when owning a leasehold property.

Once this Act comes into force, ground rent in most new leases cannot be more than “one peppercorn per year”. This does not give a precise value but is defined as “a very low or nominal rent”. In practice this is usually to the sum of £1 consideration for the year to substantiate a legal agreement between the parties involved.

No change to existing long leases

Despite the promising nature of this ban on new qualifying leases (other than a few exceptions being; business leases; statutory lease extensions; community housing leases and home finance leases) it does not address the issue retrospectively with current leaseholders who may in some cases enter into a 125 year or 999-year agreement with their landlord. This may present further issues if the current leaseholder were to assign their leasehold interest to a new buyer, who would remain bound by the current ground-rent provisions in the lease. This is especially problematic if the current leaseholder is struggling to keep up with the spiralling payment of ground rent and any ancillary administration fees, not to mention the deterrent to any possible prospective purchaser.

It seems that law makers and deciders have only begun to address one side of the coin, begging the question of how beneficial these changes will be in practice by recognising the issue but not fully addressing it with any deeper consideration or wider understanding. The saving grace for existing leaseholders is if they enter into a voluntary lease extension with their landlord after commencement, the extended portion of their lease will be reduced to the peppercorn amount.

Despite the avenues in place for freeholders to grant a new Lease of extend the current agreement, freeholders should exercise caution when surrendering and re-granting a lease on the same terms which include the ground rent provisions. Failing to comply with their removal may result in heavy fines which can reach up to £30,000 if they are found to be in contravention of the Act. Similarly, freeholders who develop land and sell as individual leaseholds should seek the appropriate legal advice when granting leases to ensure compliance with the Act.

Summary

In conclusion, the Act does protect new leaseholders from entering into an agreement after the 30th of June by capping ground rents at a peppercorn value. However, this does not take retrospective action with current leaseholders who are struggling to keep up with exponentially increasing rents, which is problematic in virtual freehold leases of a significant length. Especially if they were to assign their leasehold interest to a buyer who would be put off by the provisions. Landlords may take several courses of action to protect their leaseholders interests but must exercise caution when doing so to stay within the confines of the new Act.

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