On 12 May 2021, the government introduced the Leasehold Reform (Ground Rent) Bill into the House of Lords. The Bill was announced in the Queens Speech. This is the government’s response to the concerns which have been raised about the future level of some ground rents and how they are calculated.
In the last year or so there have been a number of cases highlighted in the national press regarding ground rents which have rendered some properties unsaleable. The main purpose of the Bill is to restrict ground rents on newly established long residential leaseholds to one peppercorn per year thereby eliminating monetary payments in most new Regulated Leases. Administration charges in relation to those peppercorn rents will also be prohibited.
Whilst the Bill has been welcomed in many quarters including the Law Society there is much work to be done in order to iron out the issues which have been highlighted by commentators. The Bill is due to enter the Report Stage of the process on 20th July and it is hoped it will be amended to reflect some of the issues raised at the Committee Stage. No one is under the illusion that leasehold reform in this country is not a complex process and needs to be carefully managed in order to avoid any unintended consequences for both tenants and landlords alike.
The starting point is the definition of a Regulated Lease. This is currently defined in the Bill as:-
- A long lease being granted for a term of 21 years or more
- Granted on or after the commencement of the relevant provisions in the bill.
- Not an Excepted Lease. It is envisaged that an Excepted Leases will include:
o business leases,
o statutory lease extensions of houses or flats ,
o community led housing, and
o home finance plan leases (either a type of equity release financial product known as Home reversion Plan or rent to buy arrangement).
The following concerns relating to the proposals have been raised by the Law Society and other commentators: -
1) Prohibited Rent
A landlord of a Regulated Lease must not require a tenant to pay a Prohibited Rent. A Prohibited Rent will be a rent which is more than a peppercorn. The main issue with the Bill is its to distinguish different types of rent. This means that this definition as drafted will capture other sums which are usually reserved in the lease “as rent” such as service charges and insurance contributions. These sums due are usually reserved “as rent” in order to provide a landlord with enforcement powers subject to the statutory rules. The result be amended to exclude service charges and insurance contributions.
The Bill also fails to acknowledge that some long leases might not be for a ground rent but a market rent. There are various reasons why parties might want to enter a long-term lease for a market rent and therefore the Bill needs to be amended to reflect this. The Law Society have suggested that (instead of a lease over 21 years) the definition of “long lease” be amended to include leases granted for a term of at least 60 years. The Bills main aim is to prevent those purchasing “long lease” leasehold properties for a substantial premium being charged exorbitant ground rents. Typically these leases are granted for a term of 60 years – 999 years. This would seem to me to be a very sensible amendment which captures the spirit of the act.
The Bill risks creating a two tier system whereby those with older leases with higher ground rents risk being penalised whilst those on new leases enjoy the benefit of a peppercorn under the new Bill. The only way a tenant under an old lease can take advantage of the benefits of the Bill would be to enfranchise which is an expensive process. The government has previously stated it is committed to reforming the enfranchisement process but proceeding with this Bill without reframing the enfranchisement process at the same time will leave homeowners under old leases disadvantaged and they may find it harder to sell as buyers and mortgage providers prefer new leases at a peppercorn rent. The Law Society has recommended that the government bring forward the proposals to reform the enfranchisement process to avoid this issue.
3) Lease Variations
The Bill will also apply to existing leases if the Landlord agrees to vary them as many variations currently constitute a deemed surrender and regrant e.g. extending the demised premises by way of a loft conversion. It is therefore likely that this will act an disincentive for landlords to agree to such arrangements. Under the current terms of the Bill a surrender and regrant would result in a peppercorn rent which no doubt the landlord will want to avoid. This will be to the detriment of long leaseholders. As a result, the government has been urged to exclude these types of variations from the Bill.
3) Lease Extensions
The Bill does not apply to lease extensions granted under the Leasehold Reform Act 1967 (for houses) or Leasehold Reform, Housing and Urban development Act 1993 (for leases) in view of the fact they already require a peppercorn rent to be granted to tenants. Whilst these statutory procedures are there to benefit tenants their procedures can be cumbersome and in practice many agreements are reached outside of the statutory procedures. It is felt that the freedom to reach an agreement outside the act can be of benefit to tenants. In relation to these outside of the act agreements the Bill unamended would result in the landlord being unable to recover the service charge and insurance premium costs where they are reserved as rent. Therefore, the Law Society has recommended that voluntary lease extensions that do not fall under the above-mentioned statutes, also are excluded from the Bill
Enforcement under the Bill is to be carried out by the already under resourced and over worked Local Weights and Measures Authorities and District Councils. The enforcement authority will be able to take action against a current of former landlords for charging tenants a Prohibited Rent. The financial penalty will be between £500-£5,000 which may not be enough to be an incentive to comply. The tenant will also be able to take action in order to obtain a refund of the Prohibited Rent. It remains to be seen whether government will allocate any additional resources to assist officers carrying out the enforcement procedures under the Bill
As you can see from the above there is much work to be done in order to knock this Bill into shape to ensure that it does not have any unintended adverse consequences for both landlords and tenants.
If you any queries regarding the issues raised in this article or other property matters do not hesitate to contact Susanne HInde on firstname.lastname@example.org or Stuart Simoes on email@example.com or another member of our Real Estate team.