Ground Rents to be Scrapped for New Residential Leases

Over recent years there have been increasing cases in the news regarding escalating, unfair and excessive ground rents and the pressing need for reform of the antiquated leasehold system in England and Wales.

Earlier this month it was reported that Carole Patterson was pursuing a negligence claim against her former solicitors FBC Manby Bowdler LLP on the basis that the firm failed to advise her when she purchased her one-bedroom flat in East Dulwich that the ground rent would double every five years and would ultimately cost her more than one million pounds per year, making her property unsaleable and un-mortgageable and, effectively, worthless.

Large housebuilders such as Taylor Wimpey and Countryside have also made the headlines this year after having been told by the UK competition watchdog, the Competition and Markets Authority (CMA), to change their unfair leasehold contract terms which double ground rents every ten to fifteen years or face legal action.

The government has listened to the problems faced by many leaseholders up and down the country and has plans to radically overhaul the currently flawed system. The Leasehold Reform (Ground Rent) Bill (“the Bill”) was introduced into the House of Lords following the Queen’s Speech on 12th May 2021 and is set to introduce the eagerly awaited Leasehold Reform (Ground Rent) Act 2021 (“the Act”).

The Bill has been welcomed by many in the industry as it will put an end to spiralling ground rent charges and will set future ground rents to zero for new leases or, to use the legal term, a ‘peppercorn rent’, which means that nothing more than a literal peppercorn can be sought from leaseholders.

When it comes into force, the Act will apply to most new leases granted after its commencement and failure to comply could see landlords facing financial penalties of between £500.00 and £5,000.00.

Landlords should also take note that if they choose to ignore the rules and charge what will be known as “prohibited rents” and go on to sell their freehold interest in a property they could still face financial penalties for a period of up to six years. Although it will be down to trading standards authorities to enforce the Act, Leaseholders will also now be able to recover unlawfully charged ground rents through the First-tier Tribunal.

Leases extended under the Leasehold Reform Housing and Urban Development Act 1993 are currently excluded from the provisions of the Act, as are community led housing and home finance plan leases.

The Act will also not apply to leases that are granted after its commencement where the parties entered into a legally binding contract such as an agreement for lease before the commencement.

Unsurprisingly, business leases are also excluded from the Act even where they are long leases granted for a premium.

Interestingly and a point worth noting is that the Act will apply where a lease has been varied after the commencement where the variation results in a deemed surrender and regrant.

Once passed into law, the reforms are not intended to have retrospective effect; so, what about the problems faced by many thousands already whose excessive, escalating ground rents could eventually make it impossible for them to sell or mortgage their properties and find themselves in what is becoming known as the “leasehold trap”?

The new legislation will go a long way to help the thousands of potential leasehold homeowners who would otherwise be caught in this snare but will the Government extend the reforms to those who already own a leasehold property, to make owning a leasehold property fairer for all?

Most in the industry would agree that it is a significant first step towards the government’s wider goal to completely overhaul the residential leasehold system in England and Wales and it will certainly have a considerable impact on developer and investment landlords as well as tenants. However, commentators were making similar predictions following the introduction of the Commonhold and Leasehold Reform Act 2002, almost 20 years ago.

In terms of wider reform, the leasehold system has long been stubbornly resistant to meaningful change.

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