Leasehold reform: new ground rent restrictions from 30 June 2022

Homeownership remains a key item on the Government’s agenda, with various proposals in the pipeline described by the Government as being aimed at making property ownership easier, more transparent and fairer. There has been a lot of publicity around escalating ground rents.  For example, a lease may provide for an initial ground rent of £500 per annum, doubling every 20 years. After 80 years the ground rent would be £8000. Not only can this lead to unaffordable rents, but property owners can find themselves unable to get a mortgage.  Aimed at resolving these issues, the Leasehold Reform (Ground Rent) Act 2022 (“The Act”) has received Royal Assent and will come into force on 30 June 2022.

What will the Act do?

The Act will limit the ground rent chargeable on most new residential long leases to a peppercorn, effectively meaning ground rents must have no financial value. Landlords will be prohibited from imposing administration charges in relation to the peppercorn rents, preventing ground rents being charged under a different name.

When will the Act apply from?

The Act received Royal Assent on 8 February 2022 and will come into force on 30 June 2022. The exception to this is leases of retirement homes, where the Act will not be in force before 1 April 2023.

What type of leases will the Act apply to?

From 30 June 2022, the Act will apply to new leases of a single dwelling (flat or house) granted for a premium and for a term exceeding 21 years.

The Act will not apply to:

• Leases for business purposes;
• Statutory lease extensions (although separate rules apply to the ground rent in such cases);
• Community housing leases; and
• Home finance plan leases.

There will be special rules in relation to shared ownership leases.

Will the Act impact leases already in existence?

No, the Act will not apply retrospectively. Leases that have already been granted or leases to be granted pursuant to contracts that have already been exchanged before 30 June 2022 will not be impacted. The Act will, however, apply to leases to be granted pursuant to existing option agreements or rights of first refusal. Landlords should be cautious varying any existing leases once the Act is in force as if such variation would constitute a surrender and re-grant, the Act could apply and thereafter prevent the Landlord from charging a ground rent.

Consequences for non-compliance

If a Landlord does not comply with the Act, trading standards authorities can impose fines ranging between £500 - £30,000 per lease and order the repayment of the ground rent collected (plus interest).

If ground rents have been charged and not refunded to the Tenant within 28 days of receipt, Tenants can apply to the First-tier Tribunal for an order requiring the Landlord to repay any ground rents they have collected.  

Commentary

The Act creates a significant change to property law. The changes will be a welcomed protection for purchasers entering into new residential leases. Landlords of existing residential leases will want to be careful not to inadvertently fall within the scope of the Act. The Act, however, does not assist leaseholders whose existing leases provide for high or escalating ground rents and it is yet to be seen whether the government will go further to assist with this.

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