The Conservatives are facing criticism for potentially not following through on their promise to eliminate ground rents, with reports suggesting that Michael Gove is struggling to make changes to current leasehold laws.

While there exists the Ground Rents Act 2022 which prohibits new ground rents in new leases and within the current form of Leasehold Reform Bill is the entitlement for a leaseholder to buy out their Ground Rent provision in their leases (although only leases with at least 150 years unexpired are eligible) there was also a commitment made by the government to abolish Ground Rent entirely.

Gove, who is in charge of leveling-up efforts, has been working on a reform bill to revamp the leasehold system. However, key provisions to overhaul leaseholds were missing from the legislation published in November.

After a consultation on capping ground rents, Gove had mentioned the possibility of reducing them to a symbolic “peppercorn” rate (essentially meaning nil) as the bill goes through parliament.

But recent reports indicate that Gove may not be successful in pushing for the peppercorn rent due to pressure from investors and pension funds who benefit from predictable income through freeholds.

There is talk of a potential compromise with a £250 annual cap on ground rents instead.

Gove had previously promised to abolish the leasehold system entirely, calling it outdated and feudal. Millions of property owners in England and Wales operate under leaseholds, a system unique to these countries.

Although the reform bill includes some changes like extending lease lengths and making it easier to convert to freeholds, the pledge to restrict ground rents to a peppercorn rate has not materialised due to resistance from Downing Street.

Critics, including Angela Rayner, the shadow leveling-up secretary, are questioning the government’s commitment to leasehold reform and accusing them of breaking promises made in their manifesto. Rayner emphasized Labour’s commitment to comprehensive leasehold reform based on the recommendations of the Law Commission.

A residential long lease would most certainly provide for a “Ground Rent”, which is an annual sum pay to the Landlord. Typically these sums are not particularly high, they average at about £100 to £300 per year, and generally go up periodically at a similar rate to inflation throughout the duration of the term of the Lease. Legally speaking, these Ground Rents are purely profit sums, in other words the Leaseholder is not receiving any particular service in exchange for paying this sum. It is simply part of the bargain of the Lease contract as at the date it was first granted.

However, what at first glance may seem innocuous can still cause some considerable issues for Leaseholders. We have seen from a previous article that the government as sought to address this somewhat by preventing any new leases from containing any ground rent provisions. However, this does not address current leases that can contain high ground rents.

One such issue are “doubling ground rents”. These are leases originally granted by developers that have rents that double every 10 or so years. When an exponential calculation is employed, those rents reach astronomical levels, rendering those leases effectively time-bombs and unmarketable. There are some developers, such as Taylor Wimpey that have voluntarily agreed to address such issues, by agreeing to vary such leases so that the clauses no longer double but are calculated according to inflation, by referencing the Retail Price Index (RPI).

However, this is not the only potential problem.

In recent times, mortgage lenders, and therefore purchasers have become increasingly aware of an unintended impact of a provision within the Housing Act 1988.

The provision in question concerns Assured Tenancies, which most would be familiar as the typical 12 month tenancy agreements used by leaseholder landlords throughout the county.

If the lease qualifies as an assured tenancy (AT) and there is unpaid ground rent, the Landlord can apply to terminate the lease and the court must end the lease and give possession back to the landlord, which the Landlord does so under Ground 8 in Schedule 2 of that Act.
The landlord does not have to compensate the tenant (i.e., the leaseholder) or the lender.

How does this impact long leaseholds?

Due to increasing ground rents, some long leases now qualify as ATs. A long lease can qualify as an AT if:
the rent exceeds £250 per year, or £1,000 per year in Greater London
• it is occupied by the leaseholder as their principal home and
• the leaseholder is an individual (i.e., the Act does not apply to limited companies).
Ground 8 applies in several circumstances, but of particular relevance to long leases is the provision that:
• if at least one quarter’s rent is more than three months in arrears, if the rent is payable quarterly (which it will be in most long leases) and
• the landlord makes an application to terminate the lease under Ground 8
This means, even for small sums of rent arrears, leaseholders could become subject to a mandatory possession order if they default on payment of ground rent.
There is no maximum lease term to qualify as an AT under HA 1988, provided that the lease was entered into after the Act came into force.

If the lease does not include an exclusion preventing the operation of the Act, a mortgage lender may require a deed of variation to ensure the Landlord does not use the provisions.
Some mortgage lenders may accept indemnity insurance.

What can the leaseholder do?

A Landlord can voluntarily agree to carry out a variation of the Lease. Provided does agree, he will likely want some compensation for the loss of rent. Furthermore the process itself will require the Leaseholder to engage a Solicitor to represent them in carrying out the extension, and the Landlord will also no doubt have legal representation whose costs the leaseholder will also be expected to indemnify.

But if the Landlord is not willing to agree, or some deal is not viable, then the only recourse available to the Leaseholder is to carry out a statutory lease extension. One of the side-effects of extending the lease in this way, is that the ground rent shall be reduced to a peppercorn (nil).
In conclusion, it is best that leaseholders and conveyancers alike be familiar with the impact of Ground Rents provided under the terms of a lease. If you require further information on the subject, do not hesitate to get in touch.

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.

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