Storm or Reform: The new Leasehold Reform Act and its flaws

May 7, 2022

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4 min read

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What's going on here?

The Leasehold Reform (Ground Rent) Act 2022 (“the Act”), entering into force at the end of June 2022, will end ground rents for certain new long leasehold properties in England and Wales.

What does this mean?

‘Ground rent’ refers to the payments that the holder of a leasehold property pays to the freeholder (or landlord) under a lease. Ground rents can be fixed throughout the term of the lease or can be set at a rate that increases over time. The 2022 Act means that any ground rents on houses and flats for new ‘regulated’ leases will be charged at a ‘peppercorn’ rate, otherwise known as ‘nominal consideration’ (i.e., a token payment given in exchange for something of greater value).

Practically speaking, this means that leaseholders of regulated leases will no longer have to pay ground rent. Any landlords failing to comply with this by continuing to take ground rent payments will be subject to fines of between £5,000 – £30,000 and leaseholders have the right to recover said rent payments. The term ‘regulated leases’ within the Act refers to residential leases granted for a term of at least 21 years in return for a ‘premium’ (i.e., where a sum is paid upfront to the landlord for the lease being granted). The new restrictions will not apply to commercial or community housing leases and, most notably, they have no retrospective effect – only future leases are included in the statutory scheme.

What's the big picture effect?

The Government’s proclaimed aim in passing the Act is to “make leasehold ownership fairer and more affordable for leaseholders”. Historically, ground rents were actually set at the ‘peppercorn’ or nominal level. However, a standard practice in relatively recent years has been the selling of properties on long leases with escalating ground rents which, having exponentially increased over time, can leave long leaseholders eventually facing very onerous payments. The granting of long leases (in contrast to instead selling the freehold title) has thus been a valuable investment opportunity for some, being able to cash in on the sale of the lease (the premium) and also accumulating ground rent thereafter. This has often been to the detriment of the long leaseholder. The new Act will hence help stop future long leaseholders from being required to pay extortionate ground rents.

However, some commentators have criticised the Act, noting that it has failed to address some of the real issues in the rental industry.

First, the Act only applies to future long leases, not existing ones. The practice of escalating ground rents has already invited scrutiny over industry bad practice, such that many housing developers have already stopped this practice on their own accord. In many cases, as far as future long leases are concerned, the legislation will only be catching up with reality. The flipside of this is that existing leaseholders facing escalating ground rents will be unaffected, failing to address real problems. Overall, the legislation will not have a significant impact, or an impact in the right areas.

Second, those who are currently facing high ground rents and looking to sell their leasehold will face further hardship as prospective buyers will be deterred from purchasing. This is because these older properties will still remain subject to ground rent and thus less attractive for buyers when compared with new regulated leasehold properties with no ground rent. 

Finally, freeholders may be encouraged to offer informal (i.e., non-statutory) lease extensions to protect their inflated ground rents. Leaseholders are currently entitled to a statutory lease extension under the Leasehold Reform Housing and Urban Development Act 1993. This statutory lease would not qualify as a ‘regulated lease’ under the 2022 Act, however extending a lease under the 1993 Act similarly means that ground rent is reduced to a nominal rate anyway. Non-statutory, informal lease extensions will hence be an important tool for landlords. Under the 2022 Act, the informally extended lease will qualify as a new lease. However, ground rent will remain payable for the duration of the existing (original) lease, and it will only be reduced to nil after the remaining term of the original lease ends. 

Overall, the Act is a step in the right direction but has missed the target of real concern – existing long leases. Existing long leaseholders battling soaring ground rents – a significant population of leaseholders in the UK – will feel overlooked. Only time will tell whether the Government will live up to its promises to address existing ground rents at a later stage, and it can only be hoped that the coming into force of the 2022 Act will increase pressure for further action in this much-needed area of reform.

Report written by Lauren Ainscough

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