The Leasehold (Ground Rent) Reforms Act received royal assent in late February this year. The Act itself is now in force. The Act brings about some fairly sweeping changes to the treatment of ground rent in relation to leasehold property following the government’s consultation on the so called “fleecehold” scandal and have been brought in with a view to providing greater consumer protection from the practice of charging large ground rents on leasehold houses and flats along with, in some cases, expediential increases in those ground rents as the term of the lease reduces.
The changes, in a nutshell, prohibit the charging of ground rents for any amount that is more than a peppercorn on new leases. There are some notable exceptions which we have dealt with below but there are implications for housing associations in relation to their stock, whether on new sales or, in some instances, resales, lease extensions and surrenders and regrants.
Preserved right to buy/right to acquire
For Associations that have either ex-LSVT (large scale voluntary transfer) stock or units that are subject to the right to acquire and, if the right to buy or right to acquire is exercised, the transaction will be dealt with by way of a lease - the historic right/obligation to charge a £10 ground rent in relation to any leasehold sales of this nature has now been removed and replaced with the peppercorn rent requirements in the new Act.
From a procedural perspective Associations should ensure that their team dealing with right to acquire and preserved right to buy transactions are aware of this change and that this change is fed through to any standard documentation used on these transactions (whether acceptance is right to acquire notices and/or lease themselves).
The consequences of failing to comply with the Act are dealt with separately below.
Shared Ownership Leases
As shared ownership leases have, by their very nature, to reserve a large rent (in relation to the portion of the property retained by the Landlord) there is, due to that requirement, an exclusion from the provisions of the Act for shared ownership.
It should be noted that the exclusion only extends to the share of the property owned by the Landlord meaning that no ground rent or other rent can be charged upon the tenant’s share. In addition, as you would expect, when the Landlord’s share reduces to 0% (meaning that the tenant is a 100% owner) the ability for the Landlord to charge anything other than a peppercorn rent falls away.
As we have mentioned below the changes are not retrospective meaning that any existing shared ownership leases which reserve a minimum rent greater than a peppercorn will continue to be permissible under the provisions of the Act.
Associations should take care in relation to schemes where a leaseholder is entitled to surrender their existing shared ownership lease and take a grant of a new non-affordable/non-shared ownership lease in the event that they staircase to 100%. This would inevitably be dealt with under the surrender and regrant rules referenced below and lead to the removal of any ability to charge a ground rent. It may well be that there is no solution to this if the shared ownership lease specifically allows for the grant of a new non-shared ownership lease on final staircasing (rather than simply removing the shared ownership elements of the existing lease (which is the current approach in the model lease)).
The new legislation deals with statutory lease extensions and voluntary lease extensions differently.
In relation to statutory lease extensions shared owners of leasehold flats currently have no statutory right to apply for an extension of that term, although, many Associations will deal with requests for voluntary lease extensions as though they had an obligation to grant such extensions (albeit that the process does not fall within the statutory framework).
Associations with long leasehold stock which is not shared ownership will, potentially, have units that do have a statutory right to extend their lease and, in the event that they have such units, any statutory lease extension would reduce the rent down to a peppercorn. There is no procedure or process within the legislation to allow an existing ground rent to be retained on a statutory extension (unlike voluntary extensions which are dealt with below).
In relation to voluntary lease extensions it is open to the Landlords to continue charging the existing ground rent until the end of the “old” term of the lease. Once the new lease term commences (i.e. the part of the term that goes beyond the original lease term) this will be subject to the prohibition on any ground rent other than a peppercorn.
What this means is that the lease extension could result in a split ground rent for the new term.
Surrender and regrant
The legislation provides specifically for surrenders and regrant (whether implied surrender and regrant or explicit surrender and regrant). Except for a situation where the surrender and regrant is a result of a lease extension where only the term is extended (in which case the surrender and regrant provisions do not apply) a surrender and regrant will result in the ground rent on the new regranted lease reducing to the peppercorn required under the legislation.
There will be many Associations with schemes set up in the 1980s or 1990s (and perhaps even some more modern ones) which have specific explicit surrender and regrant requirements in the event of the owner wishing to sell their property.
Associations should consider carefully what they wish their policy to be in relation to such leases. It may be that they are quite happy for the regranted lease to be subject to a peppercorn rent (for example if the ground rent is such a nominal figure that it is not being used to supplement the revenue for the scheme and to make it stack up financially).
However in situations where the ground rent does form part of the overall appraisal for the scheme and its removal would result in the appraisal being skewed or, perhaps, a situation where some residents in the scheme are paying a ground rent and others are not the Association would need to carefully consider its approach.
As the alienation provisions in such a lease are simply a contractual arrangement between the Landlord and the Tenant it is open to the Landlord to consider their policy in relation to this kind of situation.
For example they could choose to not formally enforce the lease but notify the Tenant that they can, in fact, assign subject to such conditions as the Landlord may wish to impose (the Landlord may need to consider whether there are any other legislative restrictions on imposing consent requirements for assignment in this manner)
Alternatively the Landlord could choose to approach existing leaseholders to vary those leases to change the alienation provisions and remove the surrender and regrant requirements (although this approach will depend on whether the reason for the surrender and regrant provisions being included within the original lease supports a particular purpose that will be defeated by removing those provisions). This would, of course, require some kind of “buy-in” from the residents if it was to be done wholesale and there would be the usual practical considerations as to solicitors fees and who would pay them and any need to get mortgagee consent from any funders which hold a mortgage on the Tenant’s property.
A further alternative would be for the Landlord to effect a policy that the variations would be addressed on the next approach from a resident who is wishing to sell their property and will be dealt with as part of the sale process (effectively removing the surrender and regrant provisions at this point and allowing the existing owner to assign). The alienation provisions could be drafted in line with, for example, the current provisions within the model shared ownership lease (if appropriate).
If an Association is undertaking an active programme of buying back properties that have come on to the open market in a particular leasehold scheme where ground rents are payable (for example with a view to re-providing them as a similar tenure of affordable housing) then they would need to consider carefully whether they would want to merge the lease back into their superior interest (effectively terminating the existing lease and any ground rent payment obligations that go with it) or whether they should retain that lease and, when they come to sell the flat again, (assuming that the lease will allow) that they then simply assign the existing lease (with the existing ground rent provisions) to the new purchaser. It may be open to the Landlord to vary the provisions of that lease to bring it in line with their tenure requirements for the particular sale provided that the variation does not result in an implied surrender and regrant (save, for example, a variation of the demised area within the lease would result in an implied surrender and regrant regardless of the Landlord’s intentions).
The legislation provides that retirement schemes have a reprieve from the ground rent prohibition until April 2023 when the provisions will come into force in respect of such schemes as well.
It is not clear from the legislation what, if anything, the government is proposing to assist on such schemes where ground rents might be essential to recovering, over the length of the lease term, the construction costs (or a proportion of them) to make the scheme more viable.
There has not been any attempt, so far, to impact “event fees” often charged on retirement schemes upon assignment to collect, for example, a deferred service charge (and allowing, during the course of the lease term, for a lower annual service charge).
Housing Associations and other providers of leasehold property should, if they have not already done so, urgently review their leasehold stock and consider whether their teams are properly informed of the changes and the potential impact on their business.
If you would like to discuss this topic in more detail, please contact Richard Stirk, Partner.