Any new residential leases created after 30th June 2022 are subject to the provisions of this legislation. The legislation prohibits leases granted after this date from carrying a ground rent aside from a    ‘peppercorn’, which means Nil.  Apart from new build leases created by Developers, this legislation also impacts lease extensions, since these are “new leases”, and therefore prohibits lease extensions from carrying provisions increasing the ground rent beyond those that are were expressed within the current lease.

In other words, a new lease extension may continue to provide for the same ground rent as contained in the current lease, but from the commencement of the extended period, the rent must become a peppercorn (nil).

A Landlord that seeks to collect illegitimate ground rent from such a qualifying lease will be liable for penalties under the provisions of the Ground Rent Act 2022.

The advent of this legislation will certain have an impact on the number of “informal” lease extensions granted by Landlords, considering one of their main motivations for granting such lease extensions was to increase the ground rents due under the lease, thereby increasing the value of the freehold. Which is something that could never be done under the statutory regime method which requires that ground rent must be reduced to a peppercorn. As such, Landlords no longer have a vested interest in being pro-active in the grant of lease extensions, and the prediction is that many will simply await the receipt of a formal claim notice (known as a “section 42” notice) from a leaseholder before cooperating with the grant of the extension. This Act is the first stage in a list of proposed leasehold reform by the government. It remains to be seen to what extent other proposals reach the statute books, but we eagerly await new developments.

There are many leaseholders who bought new build leasehold properties from developers, in which those leases contained onerous ground rent provisions, often doubling, say, every 10 years. Due to the length of such leases, such a provision can quickly reach astronomical sums potentially rendering the asset at risk of eventual negative equity. This understandably impacted the marketability of such leases and such purchasers were having tremendous difficulty selling such flats.

In September 2020, the Competition and Markets Authority (CMA) launched enforcement action against 4 leading housing developers it believes may have broken consumer protection law in relation to leasehold homes. Taylor Wimpey, for using possibly unfair contract terms, and Barratt Developments and Persimmon Homes over the possible mis-selling of leasehold homes. This was an indicator of what was soon to come in the way of the Ground Rent Act 2022 curtailing such situations from occurring. But this impacts leases granted after June 2022. What about those who already have doubling ground rents, harming the marketability of the those leases on the open market.

If your Landlord is Taylor Wimpey, there is an easy solution, as the CMA secured formal commitments from the developer, such that they will make good those leases to whomever requests this. In practice, in most cases, this comes in the way of the developer agreeing to pay a sum towards the legal costs of the Leaseholder’s solicitor (typically a flat £750) and will assist in enabling the change to from a doubling ground rent clause to one that adopts a calculation that accounts for inflation (via the retail price index -RPI ) in its calculation for how much ground rent is payable at any time. This is certainly preferable to the onerous doubling ground rents. Although, it is curious as to whether even an RPI ground rent provision conflicts with the Ground Rent Act 2022. This writer believes that it does not, considering it will not be considered a ‘new lease’ that would engage the provisions of the legislation.

What about those others who do not have such leases. Until such time that the government may address this with blanket reform, unless the Landlord voluntarily agrees to vary the ground rent provision, the only option that remains is for the leaseholder to apply for a new lease (a lease extension) under the provisions of the Leasehold Reform Housing and Urban Development Act 1993 (the 1993 Act), or in the cases of Leasehold Houses, the Leasehold Reform Act 1967. In the case of the 1993 Act, a side effect of obtaining a statutory lease extension, is that the ground rent will be reduced to a peppercorn (nil), while certainly the current ground rent is a relevant factor in the calculation of the ‘Premium’ payable to the Landlord in exchange for the Lease Extension, it is not a pure capitalisation, and will most certainly resolve an otherwise helpless situation. We would advise speaking to a Surveyor specialising in lease reform valuations. Contact us for more information.

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