Ground rent reform - the rise of the peppercorn!

Leasehold reform has been on the government’s radar for a number of years and its plans to outlaw “unfair leasehold practices” is now taking shape.  The first aspect to be tackled is the well-publicised concern around ground rents in long residential leases - these have been targeted as those with onerous escalating ground rent provisions are now difficult to sell or mortgage.

Legislation to effectively abolish ground rents by reducing them to a peppercorn, is contained in the Leasehold Reform (Ground Rent) Bill which is currently making its way through Parliament.  Although the Bill is likely to be amended, we will look at the main aspects as currently drafted and highlight concerns.

Which leases are affected?

The Bill distinguishes between regulated leases which will be governed by the new ground rent regulations and excepted leases which are not.  Under a regulated lease, a landlord cannot demand a prohibited rent i.e. a ground rent in excess of one peppercorn (not £1), and if they do, the sum has to be refunded within 28 days.  Enforcement is by the local weights and measures authority who can impose a penalty of up to £5,000 on landlords who charge a prohibited rent, and scope for more in the event of multiple breaches.

Regulated leases

• These are new long residential leases of a dwelling granted for more than 21 years. Leases which can be terminated earlier e.g. where the lease has a break date after 10 years are also included.
• Retirement housing leases will be included with the proviso that the earliest date from which the changes apply will be 1 April 2023. This is effectively a “U” turn as originally they were to be excluded.

Excepted leases

• Business leases. “Business” is defined as including a trade, profession or employment but excludes a home business use.
• Statutory lease extensions under the Leasehold Reform Act 1967 (for houses) or Leasehold Reform, Housing and Urban Development Act 1993 (for flats).
• Community housing leases and lease structures for funding purposes. These are defined in the Bill and will be subject to regulations which will be specified in the future.
• Shared ownership leases. Where the tenant's interest in the lease is less than 100%, the payment of a peppercorn rent will apply in respect of the tenant’s share, however the landlord can continue to charge an additional rent in respect of its share.

Impact on existing arrangements

Although the changes will not apply retrospectively to leases granted before the commencement date of the Act, they are likely to impact on existing arrangements, for example:

• Agreements for lease. Where a landlord has entered into an agreement for lease (before the commencement date) which contains a monetary ground rent in that lease, then they will still be able to demand that ground rent even if the new lease begins after the commencement date.
• Options and rights of pre-emption. Leases granted after the commencement date will be caught even if they are granted pursuant to an option or right of first refusal which was entered into before the commencement date.
• Surrender and re-grant. Existing leases which are varied after the commencement date to the extent that they amount to a surrender and re-grant, will have to set ground rent as a peppercorn.  This is a potential problem as landlords are unlikely to agree to any lease variation, even routine ones and so this could adversely affect leaseholders.
• Voluntary lease extensions (not through the statutory enfranchisement process). The landlord can retain the existing ground rent arrangements in the new lease, but only for the period that was covered by the existing lease, so in the “extended part”, the ground rent must reduce to a peppercorn.  These voluntary arrangements are often more favourable to tenants than going through the statutory process, so there are calls for the voluntary extensions to be treated as an excepted lease.

Main concerns

Unfortunately the Bill as drafted may have unintended consequences; apart from the points above, the main concern is in relation to rent.  “Rent” is defined as including “anything in the nature of rent, whatever it is called”.  This would catch sums which are usually reserved as “additional rent” or “payable as rent” e.g. service charge and insurance contributions.  As the intention of the Bill is to tackle only ground rents, landlords are hoping that the definition of “rent” will be amended to clarify that these sums are not included. 

Overall the Bill is to be welcomed, however, unless enfranchisement is reformed at the same time, a two-tier system could be created i.e. new leases paying a peppercorn will be more attractive than older leases with higher ground rents.  Those with older leases would only be able to reduce the ground rent to a peppercorn if they enfranchise and as the calculation of the premium is linked to the amount of the ground rent, doing this could be prohibitively expensive under the current regime.

It will be interesting to see what amendments will be made to the final version of the Bill particularly in relation to the rent aspect – the government’s concern is that landlords do not exploit a loophole and try to charge a ground rent by calling it another name, whilst tenants will want the wording to remain.  There is no indication as yet when the Bill will become law, so it is definitely a case of watch this space!

If you would like to discuss this topic in more detail, please contact Deborah Powell or Lyndon Campbell.