Ground rent issues
In England and Wales, most owner-occupied flats are owned on a long leasehold basis. Long leases normally require the leaseholder to pay ground rent to their freeholder. The lease sets out the amount of ground rent payable and the basis for increases over the term of the lease. The landlord is not required to provide a service in return for ground rent.
In some cases, the rights to receive ground rents from leaseholders have been bought and sold in the financial market as a long-term income stream for third party investors.
Historically, ground rents were set at a ‘peppercorn’ or nominal level. However, in recent years a practice has emerged of developers selling properties on long leases with higher ground rents at the start and shorter ground rent review periods. As a result, long leaseholders can quite quickly face onerous and unsustainable ground rents.
High and escalating ground rents can make it difficult for leaseholders to sell or re-mortgage their property. Onerous ground rent terms can also have an adverse effect on leaseholders’ ability to buy their freehold or to extend their lease. This is because the ground rent charged is a factor in the valuation process.
The Leasehold (Ground Rent) Act 2022
Once in force, the Act will restrict ground rents on newly created long residential leases (with some exceptions) to a token one peppercorn per year. This effectively restricts ground rents to zero financial value. The intention is to make leasehold ownership fairer and more affordable for leaseholders.
A breach of the ground rent restriction will be a civil offence for which there will be a fine of up to £30,000.
Freeholders will not be allowed to make an administration charge to collect peppercorn rents.
The Act will come into force on a date to be specified by the relevant Secretary of State. But for retirement home leases (a lease relating to a dwelling that can only be occupied by people aged 55 or over), the Act’s provisions must commence no earlier than 1 April 2023. This is intended to give the retirement sector, where ground rents are often used to help fund the additional costs of providing communal spaces and facilities, additional time for transition.
The Government has committed to comprehensive reform of the leasehold system. The Leasehold Reform (Ground Rent) Act 2022 is the first part of this process and further leasehold reform is expected.
The Act will only apply to new leases and will not assist existing leaseholders faced with high and escalating ground rents.
No timescale has been given for future leasehold reforms as recommended by the Law Commission.
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