Ground rents on residential leases will soon be gone – here’s what registered providers need to know about the Leasehold Reform Act 202223/06/22
The Leasehold Reform (Ground Rent) Act 2022, coming into force on 30 June 2022, will remove ground rent payments for new residential long leases in England and Wales.
Read on to find out which leases are affected, the changes landlords can expect and our top tips for complying with the new provisions.
Which leases are caught by the Act?
The Act applies to regulated leases, which are long leases (running for more than 21 years) of a single dwelling for a premium, granted on or after 30 June 2022.
The Act does not work retrospectively, so any existing leases are not affected by this change. However, if an existing lease is surrendered and re-granted (for example, to alter the extent of the premises) then it will usually be caught by the Act if it meets the criteria detailed above.
Leases which are exempt from the provisions of the new Act include:
- business leases,
- statutory lease extensions,
- community housing leases and
- home finance plan leases.
What is prohibited under the Act?
Regulated leases should not contain provision to charge an annual ground rent of more than one peppercorn. Ground rents should not be collected for properties occupied under regulated lease.
The Act will tackle the issue of residential landlords imposing “doubling ground rents”
If an initial ground rent of £600 doubles every 10 years, the cost will quickly escalate – to over £1.2m per annum at the end of a 125-year lease. The Government has removed ground rent payments to provide a fairer and more transparent homeownership for buyers and help with managing the cost of living increases. It argues that this will remove problems faced by homeowners of leasehold property where ground rent has increased substantially each year.
What if landlords don’t comply?
If a ground rent higher than a peppercorn is charged on a regulated lease, landlords face strict financial penalties between £500 and £30,000 – as well as having to recover the mischarged ground rent.
Top tips for registered providers
Due to the nature of new homes and void disposal properties, many leasehold sales will be affected by the new Act. Landlords need to ensure they are not charging any ground rent on regulated leases granted after 30 June to avoid potentially large financial penalties. You will need to:
- Update your precedent leases to limit ground rents to a peppercorn.
- Check that your internal teams know that they should not be collecting ground rent on regulated leases.
- When granting a regulated lease, e.g. of a new development, you need to look carefully at your financial modelling. The removal of ground rent might mean you need to reconsider the rent and/or premium being charged for that lease.
- Review your approach to granting voluntary residential lease extensions, as these will now be covered by the Act (whilst statutory lease extensions are excluded). In our experience, however, most registered providers grant voluntary lease extensions on the basis of a peppercorn ground rent in any event.
It is important to review all residential leasehold sales which will complete on or after 30 June 2022 as the ground rent provisions may need to be adapted.
How Capsticks can help
Capsticks aims to be the firm of choice to registered providers, offering a full service across development and planning law, corporate and securitisation, housing leasehold and asset management. We can provide advice and assistance on the changes discussed above and update your precedent leases to comply with the new provisions coming into force.
If you have any queries around what's discussed in this article, and the impact on your organisation, please speak to Zayna Ibrahim or Georgia Moon to find out more about how Capsticks can help.