The government has announced that charging ground rent in long leases for residential properties (both houses and flats) in England and Wales will be banned from 30 June 2022, when the Leasehold Reform (Ground Rent) Act 2022 comes into force. The government has said that this is part of the most significant changes to property law in a generation and that they firmly believe that the new provisions will lead to fairer, more transparent homeownership for thousands of future leaseholders.

What is ground rent?

Ground rent is an annual sum payable by leaseholders to the landlord for essentially occupying the land on which their property stands. Where a ground rent is charged, it can range from just £1 to several hundreds of pounds a year. Some leases also contain provisions that allow the landlord to review the ground rent and increase it, and even double it, after the period of time specified in the lease. This has caused some properties to become difficult to sell due to the onerous ground rent provisions being unacceptable to some mortgage lenders.

The new rules mean that from 30 June 2022, landlords will only be able to set the annual ground rent as one ‘peppercorn’ in new leases, which means no ground rent will be payable by the leaseholder. Landlords will also be banned from charging administration fees for collecting a peppercorn rent. Landlords can face fines of up to £30,000 if they charge ground rent contravening the new rules.

Ground Rent Ban

Reduction of ground rent

With this soon becoming inevitable, some developer landlords have already agreed to reduce the ground rent to a peppercorn for prospective buyers. Where the developer has not voluntarily agreed to this, given that it is just two months before the new rules come into effect, prospective buyers may consider holding off proceeding until then.

The new rules will also apply to retirement homes, but the government has indicated that this will not come into force until 1 April 2023 at the earliest.

What leases qualify for the new rules?

The new rules reducing the ground rent only apply to future leases and not retrospectively, i.e. the ground rent payable for existing leases will not automatically reduce to a peppercorn on 30 June 2022. However, the new rules may benefit some existing leaseholders looking to extend their lease ‘informally’ with their landlord. The new rules mean that when the landlord voluntarily agrees to extend the lease, it will not be allowed to increase the ground rent for the remaining period of the original lease term and when the original lease term expires, the new term must have a ground rent of a peppercorn. This does not affect leaseholders looking to extend their lease through the statutory route, where the ground rent is immediately reduced to a peppercorn once the lease is extended, and a minimum of 90 years is added to the lease term.

There are also talks in parliament that the leasehold sector will be further reformed, and further rules will be put in place to make it easier for existing leaseholders to extend their leases by 990 years at a peppercorn ground rent rather than just 90 years, although there is no set implementation date for this yet.

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If you have any more questions or would like more information regarding the Leasehold Reform (Ground Rent) Act 2022, you can contact our Residential Property Team below. 

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