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Reform of the regime governing residential long leaseholds (leases of dwellings for a term of twenty one years or more) has been going on for over fifty years. The latest reform is to restrict a landlord’s ability to charge ground rent on top of an initial premium paid on the grant of the lease. Ground rent is a sum the tenant pays annually, in addition to the lump sum for the lease itself. Unlike insurance rent and service charges which the tenant must also pay, ground rent is seen as an ongoing windfall for the landlord, as it is not referable to provision of a service.
Restriction of ground rent
The Leasehold Reform (Ground Rent) Act 2022 creates a new category of “Regulated Leases”. These are long residential leaseholds granted on or after 30 June 2022. Regulated Leases will make up the majority of all leaseholds granted, although there are some exemptions (see below). It will be a civil offense to grant Regulated Leases which have provision for payment for a Prohibited Rent, that is ground rent of anything more than “a peppercorn”, which is the historic way of expressing that no rent is payable.
All business leases are exempt. Where there is a residential element in the premises let which significantly contributes to the business premises (for example, a flat over a shop occupied by the shopkeeper), this too will be exempt, provided that the landlord and tenant serve notices on each other before The lease is granted confirming their intention to use the premises, or to allow the premises to be used, for business purposes.
Shared ownership leases are a type of home ownership marketed to those who would otherwise be unable to afford to buy a home. The long leaseholder, in general terms, buys a share of the leasehold, and pays rent to the landlord for the other share. Landlords must be registered and follow a prescribed regime.
Shared ownership leaseholders will pay a peppercorn rent on the share of the leasehold that they have bought, but will continue to pay rent on the landlord’s portion.
These are leases where the landlord is a type of social landlord, either a community land trust or a cooperative. The landlord will be permitted to charge ground rents here as they are the only way that the landlord will have for paying for shared community services.
These are regulated home reversion plans, and homes bought using “rent to buy” arrangements, such as sharia mortgages, where the ground rent is essential for the model to work as intended.
Local weights and measures authorities (formerly, trading standards authorities) will be responsible for enforcing the provisions. Financial penalties available will range between 500 and 30,000. They will also be able to order payment of prohibited rent (plus interest) by past and current landlords to the tenant.
During the passage of the Bill through Parliament, there was disquiet at the capacity of the local weights and measures authorities to take on such work, with no extra funding made available. More realistically it will be up to individual leaseholders to ensure compliance; they can apply for an order against landlords to recover unlawfully charged ground rents through the First-tier Tribunal. It would also be negligent of any conveyancer if they failed to point out to a leaseholder that the lease reserved a prohibited rent.
Criticisms of the Act
The Leasehold Reform (Ground Rent) Act 2022 is not retrospective. Explanatory notes published with the Bill state that the UK Government wished to be fair to landlords; It is probably more likely that the UK Government wished to avoid a challenge under the Human Rights Act 1998. The Competition and Markets Authority (“CMA”) have brought actions against some large house builders for mis-selling of leasehold houses, which have resulted in those landlords agreeing not to enforce the ground rent provisions.
In addition, there will be no restrictions as yet on creating leases of dwellings for the over 55s – leases of retirement homes – with ground rent provisions, as this industry sector has lobbied hard to have another year to get their spreadsheets in order. They will not be affected by this Act until 1 April 2023.
The Leasehold Reform (Ground Rent) Act 2022 will be welcomed by anyone who buys a long leasehold, but for developers this of course destroys an established income stream. However, it is a reform that has long been fore-shadowed, and arguably provides a fair balance in landlord and tenant relations in the residential housing sector.
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