The Leasehold Reform (Ground Rent) Act 2022 (“the Act”) has been described by the Government as “Part of the most significant changes to property law in a generation” and marks the first of a series of anticipated reform.
Why is the Act being introduced?
By effectively abolishing future ground rent, the Act has been welcomed by leaseholders in England and Wales in alleviating unnecessary additional costs.
The Government has confirmed “We firmly believe that the Act’s provisions will lead to fairer, more transparent homeownership for thousands of future leaseholders” and we look forward to the changes that this brings.
What does the Act do?
The Act focuses specifically on ground rent clauses within future long residential leases. It sets the ground rent which is payable to a landlord at a “peppercorn” for all new qualifying leases.
The Act also prohibits landlords charging administrative fees in connection with demanding and obtaining the peppercorn rent.
What is a “Qualifying Lease” for the purpose of this Act?
A “Qualifying Lease” for the purpose of this Act is a residential long lease which was originally granted for more than 21 years.
This means it would cover:
• A lease granted for a premium; and
• A surrender and re-grant
NOTE: This second category would include a deemed surrender and re-grant of a lease i.e. where the term is being extended by way of deed of variation or additional property is being included within the demise.
When does the Act come into force?
The Act received Royal Assent on 8 February 2022 and the Government have just announced that most provisions are planned to come into force on 30 June 2022.
Provisions for care homes under the Act are not likely to come into force until after 1st April 2023.
It is worth noting that the provisions of the Act are not retrospective.
What is excluded from the Act?
The following do not fall within the scope of the Act:
- Business leases;
- Statutory lease extensions of houses and flats;
- Community housing leases;
- Home finance plan leases;
- Shared ownership leases.
What impact does the Act have?
If a landlord grants a new qualifying lease with a ground rent which is not a peppercorn, a landlord will be subject to sanctions for non-compliance with the Act. Such penalties include the landlord having to refund improperly received ground rent and associated administrative charges for collecting ground rent, within 28 days and the landlord may be liable for fines of up to £30,000 per qualifying lease.
HEALTH WARNING: Potential pitfalls to be aware of as a result of the Act being introduced
1. If parties are considering entering into a deed of variation to a lease where the proposed variation amounts to a deemed surrender and re-grant of the lease (e.g. if the term or demise is changed), the parties will need to be aware that any ground rent should be reduced to a peppercorn in order to comply with the Act. In such an instance, the lease may have become a “qualifying lease”. Careful attention should, therefore, be paid to any future deeds of variation.
At present a landlord is able to increase ground rent by way of deed of variation if it is in consideration of another change to the lease. As stated above, the parties need to be aware of potentially triggering a deemed surrender and re-grant in these circumstances.
2. Past Landlord Liabilities need to be considered when freeholds are being purchased.
Once landlord’s start getting to grips with the extent of the provision of the Act, will we see a flurry of freeholders offering lease extensions in a hurry to beat the commencement date?
Watch this space for more details on the commencement date.
For more information on your leasehold matters, please contact Yashmin Mistry, Managing Partner by email on email@example.com or by telephone 020 7644 7294 or connect with her on LinkedIn, Alex Porter by email on firstname.lastname@example.org by telephone 020 7644 7273 or connect with him on LinkedIn, or Natasha Lawson by email on email@example.com or by telephone: 0207 644 6097 or connect with her on LinkedI.