There are approximately 4.6 million leaseholder homes in England, 68% are flats and 32% are houses. In recent years there has been an emergence of properties on long leases (those granted for a term of more than 21 years) with higher ground rents which has resulted in long leaseholders paying onerous ground rent.
High and escalating ground rent can make it difficult for leaseholders to sell or re-mortgage their property. There has been evidence that developers have started to sell new build houses on long lease agreements to use high ground rent as a future income stream. In some cases, leases include clauses providing for ground rent to double every 10 years.
The Leasehold Reform (Ground Rent) Bill 2021 – 2022 has sought to rectify this problem by restricting the payment of ground rent on future residential long leases. On the 24th January 2022 the bill passed its third reading in the House of Commons and is now set to become law.
What is ground rent?
Ground rent is normally payable to the landlord as a condition of the lease agreement but landlords are not required to provide a service in return for the ground rent. The lease will state the amount of ground rent payable and set out how often and the rate by which the rent can increase over the terms of the lease.
What does the Leasehold Reform (Ground Rent) bill change?
The bill has abolished ground rent on newly created long residential leases to ‘one peppercorn’ which restricts the ground rent to zero. The purpose of the bill is to make leaseholder ownership fairer and more affordable.
Limitations with the bill
There are, however, current limitations with this proposed reform:
The bill will only apply to new leases and it will not assist existing leaseholders facing escalating ground rents. During the recent debate there was a proposed amendment to the bill that would have seen ground rent removed for all existing properties but this was defeated by 306 votes to 162.
Concerns that freeholders may pressurise leaseholders to agree voluntary lease extensions before the Act is fully in force.
The bill does not apply to business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases.
What are the sanctions for non-compliance?
A breach of the ground rent restrictions will be a civil offence for which enforcement authorities can impose a financial penalty of between £500 and £30,000.
The removal of ground rent is an important improvement to the leasehold system for future generations of homeowners. However there has been concerns that the bill represents “the picking of a single apple in the orchard” and the government will need to do more to substantially change the leasehold system.
If you require comprehensive legal advice relating to leasehold properties, please contact Farleys’ property team today on 0845 287 0939 or contact us by email.