Leasehold law and property management updates and issues in 2021 have flown by. This year has seen the Government announcing additional funding for building safety; the Fire Safety Act 2021 receiving Royal Assent; the extension of the Waking Watch Relief Fund; a consultation on personal emergency evacuation plans in high rise residential buildings; the Government’s response to the consultation electric vehicle charging in residential and non-residential buildings; and of course the Leasehold Reform (Ground Rent) Bill published in May. This Bill limits ground rent in new residential long leases to a peppercorn. The Bill will now make its way through Parliament.
I’d like to go over the Leasehold Reform (Ground Rent) Bill in this blog as it’s been a big topic over the past few years, and the legislation will limit ground new in new residential long leases to a peppercorn rent.
Leasehold Reforms and Ground Rent Issues
This reform was big news for so many, it’s taken a few years to push through Parliament. There will be changes in the way leases are issued for new homes but what does ground rent really mean or warrant? Ground rent allows a leaseholder to occupy land that belongs to someone else is ultimately what it means and the new reforms are being put in place to protect leaseholders from unscrupulous landlords.
Ground Rent Issues
As you will know, most leases are “long” (i.e. more than 21 years) and normally require the leaseholder to pay ground rent to their freeholder or landlord. The team here at LMP Law know that the Lease is the biggest cause of issues when read in hindsight! That’s why I am so passionate about ensuring agents are super transparent with their purchasers before they buy.
Many leaseholders don’t particularly understand ground rent and so when they are told to just pay it and no requirement to provide what those services are of ground rent, it can lead to confusion and frustration. A reminder, the lease agreement sets out the amount of ground rent payable and the basis for any increases over the term of the lease. Where it sometimes becomes more complicated is when the rights to receive those ground rents (from the tenants/leaseholders) have been paid for and thereafter sold into financial markets as a long-term income stream for third party investors. A commercial strategy of course, but it does complicate matters somewhat!
What has the Government done to reform the leasehold system when it comes to ground rent? Well, the Leasehold Reform (Ground Rent) Bill 2021-2022 is the beginning of this process. It’s the first part and we are waiting to hear the next part in 2022. New leases and flats have been getting ready for this change since 2017 and many landlords are already charging “peppercorn” rates, however the landlords who aren’t yet up-to-speed may be in for a compliance headache if they don’t adhere to the new law.
Onerous ground rent
What’s “peppercorn”? The historical payment of a ground rent being at a very nominal level. Why do ground rents become onerous and heavily obligated? We’ve properties being sold on long leases with quite high ground rents meaning long leaseholders quickly face unsustainable ground rents. The impact on the leaseholder means it’s tough to sell their property, get a lease extension or remortgage. Before the reform, the courts had no discretion to grant relief from forfeiture, making it extremely difficult for tenants to fight their case.
Ground 8 possession claims: assured tenancies
Where ground rents have exceeded £1,000 per year* lease agreements are classed as “Assured Tenancies” under the Housing Act 1988.
As ground rents have risen the lease agreements are classed as assured tenancies under the Housing Act 1988. This means that for even small sums of ground rent arrears, leaseholders could be subject to a mandatory possession order if they were to default on payment of ground rent.
*£1000 per year in Greater London and £250 elsewhere.
Whilst the Bill passed through the House of Lords, various concerns were flagged however, being:
- It only applies to new leases, so not helpful to existing leaseholders;
- Worry that landlords who are not so “legitimate” might manipulate leaseholders to agree voluntary lease extensions, as a means to continue their ground rent arrangements;
- How will trading standards be able to enforce new legislation when their budgets are already tight?
- Where the grey definition of “ground rent” is too broad to pin down.
- Retirement Homes and their leases – the dates for the actual commencement date of the Bill is still uncertain, making transition complex. Said not before 2023, so watch this space
2022 and 2023 Leasehold Reform Updates
The Secretary of State, Robert Jenrick, said leasehold reform would be tackled through two pieces of legislation with the Bill committed to setting “future ground rents to zero”.
Here’s the list of the next part of the legislation:
- Reform the process of enfranchisement valuation used to calculate the cost of extending a lease or buying the freehold.
- Abolish marriage value (the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease).
- Cap the treatment of ground rents at 0.1% of the freehold value and prescribe rates for the calculations at market value. An online calculator will simplify and standardise the process of enfranchisement.
- Keep existing discounts for improvements made by leaseholders and security of tenure.
- Introduce a separate valuation method for low-value properties.
- Give leaseholders of flats and houses the same right to extend their lease agreements “as often as they wish, at zero ground rent, for a term of 990 years”.
- Allow for redevelopment breaks during the last 12 months of the original lease, or the last five years of each period of 90 years of the extension to continue, “subject to existing safeguards and compensation”.
- Enable leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term.
Non-Compliance of the Bill?
Will there be any sanctions is a very pertinent question for everyone involved. A breach would happen if a landlord doesn’t reimburse a payment to a leaseholder within 28 days of receipt of the ground rent if it was demanded in respect of a qualifying lease.
When would a leaseholder be able to apply to the First-Tier Tribunals (Property Chamber)? They’d have a right to apply to the FTT that their new lease should have a term included being peppercorn rent instead of prohibited ground rent.
Don’t forget the fines! Non-compliance of the new legislation could hit landlords with a fine of up to £30k (per qualifying lease) and it’s up to the local authorities and trading standards to enforce those.
It’s always a good conversation to have with specialist leasehold lawyers if your company owns a large portfolio of freehold properties as we understand the issues of human rights and existing contracts.
LEASEHOLD LAW Summary
The aim of the Leasehold Reform Bill is to regulate future long residential leases exceeding 21 years (“regulated leases”) that are granted on and after the date the Bill comes into force.
New homes being sold as leasehold rather than freehold was and is the main criteria for the Government looking into passing this new Bill. With each leasehold home comes the ground rent term which can be costly and inhibitive when it comes to selling the property or extending the lease. The Law Commission wanted to change buying a freehold or extending a lease to become “easier, faster, fairer and cheaper”.
LMP Law is up-to-date on helping property managing agents and landlords navigate their way around the new legislation, especially as the Government is proposing the requirement of regulating all property and managing agents. The Regulation of Property Agents Working’s Final Report carried about in 2019 can be read HERE but if you’d like to have a chat with anyone in our team to talk about the implications then we welcome your call.
What a year! Let’s see what 2022 brings! As always, do drop me or the team a line if you’d like a chat about anything that I’ve talked about in this article.