How the Leasehold Reform (Ground Rent) Bill sets out to abolish onerous ground rents

Posted: 03/09/2021

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The Leasehold Reform (Ground Rent) Bill was introduced to Parliament in May 2021. It sets out to implement the government's objective of capping ground rents by restructuring the residential leasehold framework.

In particular, the Bill provides that new, long residential leases should only be granted at a peppercorn rent and that administration charges cannot be charged in relation to them. The Bill’s introduction of ‘prohibited rents’ in general restricts ground rents on newly established long residential leaseholds, or "regulated leases", to one peppercorn per year. This effectively restricts the monetary value of ground rent payments to zero.

In this article we highlight some of the important proposals in the Bill, who it will affect when it comes into law and key considerations for landlords.

Regulated leases

The Bill will apply to long leases, generally of a term of 21 years or more, of dwellings granted on or after commencement of the relevant provisions of the Bill. The "excepted leases" under the Bill include business lease renewals, statutory lease extensions of houses and flats, community-led housing and home finance plan leases (either a type of equity release or a rent to buy arrangement). Special rules also apply to shared ownership leases and certain leases where they replace pre-commencement leases.

Enforcement of the Bill

The Bill places a duty on Trading Standard Authorities in England and Wales to implement its measures, with the responsibility of enforcement also given to district councils.

A breach of the ground rent restrictions by a landlord will be a civil offence with a financial penalty of between £500 and £5,000. Where "prohibited rent" payments have been made, the Bill makes provision for leaseholders to recover unlawfully charged ground rents through the First-Tier Tribunal.

Compensation schemes

There is currently no compensation scheme built into the Bill for developer landlords or ground rent investors who are otherwise reliant on ground rent income. Some developer landlords and ground rent investors argue that the Bill represents an appropriation of their assets that should be off set by compensation schemes. If this challenge is successful, the government could be required to pay billions of pounds in compensation to affected landlords.

Onerous leases

The government is putting pressure on developers who have sold onerous leases to provide support for current leaseholders and welcomes the schemes that some developers have introduced to assist individuals with onerous leases.

The Public Pledge for Leaseholders promoted by the government contains a commitment by freeholders to identify any existing leases within their portfolios that contain ground rents that double every 20 years and to contact the relevant leaseholders to offer to vary their leases. However, the Public Pledge for Leaseholders is not binding, and the government acknowledges that assistance must go further and faster. It is hoped that more information will become available on the assistance to those leaseholders who have purchased leases that are proving very hard or impossible to sell because of the level of the ground rents payable.

Dates

The consultation process started in July 2017 and the government published their response to the consultation in December 2017 indicating that they would seek to bring forward legislation. A further press release in January 2021 indicated the government's intention to provide leasehold reform. It is uncertain when the Bill will come into law, but debate in the House of Lords indicates that it may take effect in 2023. However, the Bill makes clear that the earliest it would take effect for care homes would be 1 April 2023.

It appears that when the Bill becomes law, it will take effect at different times for different kinds of leases. However, the government’s view is that there should be no transitional period following commencement of the legislation, because of the advance notice of the proposals.

Commercial considerations for landlords

The Bill seems to indicate that agreements entered into before the Bill takes effect will not be captured by the provisions of the Bill. There will not be retrospective application of the Bill. This is not to say that the Bill will not make provision in respect of such agreements as part of the government's programme of leasehold reform. Additionally, any relevant agreement entered into before the enaction of the Bill but subsequently amended to the extent it would necessitate a re-grant of the lease, will be subject to the new provisions and the ground rent cap in the Bill.

The definition of "rent" is particularly wide in the Bill, including "anything in the nature of rent, whatever it is called". Landlords should consider this when drafting agreements to ensure that any charges the landlord wishes to make, and that the Bill does not have the intention of capturing, cannot inadvertently fall into the Bill's definition of "rent" and therefore be liable to enforcement action by leaseholders.

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