The Leasehold Reform (Ground Rent) Bill has been published

The Leasehold Reform (Ground Rent) Bill (the Bill) was published on 12 May 2021.

If it becomes law ground rents will limited to a peppercorn rent in new long leases of houses and flats.

Which leases will be affected and when?

The measure will cover new leases of houses or flats which are granted for more than 21 years.

If it becomes law the measures will not apply retrospectively so ground rents in existing leases will not be affected. The requirement for the rent to be a peppercorn will also not apply where prior to the Act coming into force, the parties have entered into a legally binding contract in relation to the grant of the lease (other than an option or right of first refusal). So parties entering into a sale contract now for the grant of a long residential lease at some point in the future will be bound by the ground rent they have agreed, even if the Act comes into force before that lease is granted.

The Bill sets out that it may come into force on different dates for different types of leases; for example, it specifically states that the measures will not apply to leases of retirement homes before 1 April 2023. However, this will offer little comfort to those operators in the retirement living sector who originally anticipated they would be exempt from this measure.

The Bill will cover leases created by virtue of a variation of a lease which results in a deemed surrender and regrant. If the Bill becomes law, landlords of existing residential ground rent leases will want to ensure they do not inadvertently create a surrender and regrant situation, for example, by extending the term or the demise of a lease.

The Bill will apply to long residential leaseholds in England and Wales.

The rent

A peppercorn rent has zero financial value and is literally the right to receive one peppercorn. In practice you would not expect a landlord to ever demand a peppercorn rent.

The definition of rent in the Bill as drafted appears to go further than ground rent and 'includes anything in the nature of rent, whatever it is called.' This will be of concern to landlords as service charge and insurance payments are often reserved as rent.

No administration charges will be permitted in relation to peppercorn rents.

Are there any exceptions?

There are limited exceptions to the long leases that will be caught by the provisions. Those set out in the draft Bill are: 

• Business premises which include a dwelling, and the use of the premises as a dwelling significantly contributes to the business purpose. There will be a formal notice procedure to fall within this exception. Business does not include a home business within the meaning of Part 2 of the Landlord and Tenant Act 1954.
• Statutory lease extensions of houses or flats. It is worth noting that although excepted from this legislation, those existing tenants of flats who seek a statutory lease extension be entitled to a new lease for term equal to the unexpired residue of the existing lease plus 90 years, all at a peppercorn ground rent. Those extending the lease of a house will be subject to a modern ground rent. A premium is paid for the extension of both houses and flats but this premium, as well as the terms on which the extension is granted, are also subject to proposed reform (see below).
• Community housing leases (here the landlord will be a community land trust or it will be a dwelling in a building controlled or managed by a co-operative society).
• Home finance plan leases. These must meet any conditions specified in regulations made by the Secretary of State. It is noted that this exemption covers home reversion plans which are a type of equity release product, and rent to buy arrangements such as those used under Islamic/Sharia compliant finance.

Special provision is made for shared ownership leases whereby the rent will be a peppercorn in relation to the part owned by the tenant but the landlords of those leases will be able to continue to charge rent on their share. 

Voluntary lease extensions...

Where there is a voluntary lease extension of an existing lease (and that existing lease was granted prior to the Bill becoming law), the ground rent can, up to the expiry date set out in the existing lease, be for more than a peppercorn provided it does not exceed the level of rent specified in the existing lease. After the expiry date which was set out in the existing lease, the ground rent will be a peppercorn. 

Remedies and enforcement

The Bill sets out that, save as permitted by the legislation, if the ground rent is set at more than a peppercorn, then that should be disregarded and replaced with a peppercorn rent. Where this is an issue an application can be made by the tenant to the First -tier tribunal.

Trading standards (or district councils if they are not trading standards authorities) will have powers to enforce the provisions. A breach of the ground rent restrictions will be a civil offence with a financial penalty of between £500 and £5,000. Tenants will also have a right to recover unlawfully charged ground rents through the First-tier Tribunal. An enforcement authority may assist tenants with their proceedings in relation to the First- tier tribunal.

What next?

The government notes that the Bill is the first part of two part legislation in relation to leasehold reform. Further measures, which have already been announced, will include:

• introducing a right for leaseholders of both houses and flats to extend the lease of their property by 990 years at zero ground rent;
• reforming the basis on which the premiums payable to buy the freehold or extend a lease are calculated; and
• enabling leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term.