Ground Rent: Fines for Landlords Charging Ground Rent

The Leasehold Reform (Ground Rent) Act 2022 was introduced on 30 June 2022. The new act forbids landlords with long residential leases from collecting ground rent on new leases. The law applies to all relevant properties in both England and Wales. Ground rent is a recurring payment the leaseholder must pay the landlord as per the terms of the lease contract.

It is payable as when one buys a leasehold property because unlike title absolute, where one owns the land and the buildings thereon, a leasehold title is for a fixed and diminishing term of years (the residue of an original number of years granted) and is for the right to own (for the remaining term of years) the right to occupy the property as identified in the lease plan and the description of the demise, and, as the ownership does not include the land, the leaseholder until now, customarily pays the freeholder ground rent.

This Act has been introduced to end the rising yearly ground rent for leasehold property owners which has been a convention since Tudor times! This new legislation triggered the scandal of ground rents doubling every 10 years. Banning ground rent on new leases also aims to make ownership of homes cheaper, fairer, and more secure.

What are The New Rules On Ground Rent?

Under the Leasehold Reform (Ground Rent) Act, landlords are banned from charging ground rent on most new long residential leases in England and Wales. A long residential lease has a term of 21 years or more. Post the new legislation for most new leases, the ground rent cannot be legally more than “one peppercorn annually.”

A “peppercorn rent” is a notional rent that’s neither demanded nor paid. It means that money cannot be legally charged or paid as ground rent on leases controlled by the Act. The Act also forbids landlords from charging administration fees for collecting a peppercorn rent.

The Leasehold Reform (Ground Rent) Act Applies To Specific Leases

The Act only applies to the qualifying leases. They are defined in the Act as follows a lease granted:

- for more than 21 years old and intended to be a single residential dwelling.

- for a premium. Here, premium means a type of payment that does not include the rent. It means the price paid to buy the leasehold property.

- on a property on or after June 30, 2022, or, an agreement for the lease was completed before June 30, 2022, and

- where the ground rent collected from the leaseholder is more than one peppercorn per year.

Exceptions

There are some exceptions to the Act. The Act does not apply to:

- Non-regulated leases

- Retirement homes

- Leases offered to community-led housing.

- Shared ownership leases of specific types where rent is payable on the retained share of the landlord.

- Agreements in which buyers and sellers have mutually agreed to and completed the grant of a lease before 30 June 2022.

It is important to note that the new ground rent rules take into account the exchange date and not the completion date of the lease.

Transactions That May Fall With The Purview Of The Act

If a lease is surrendered and a new lease is re-granted, then the new lease will fall within the Act. Consequently, no ground rent will be payable by the leaseholder. Existing leaseholders may enter into lease extensions voluntarily after the commencement of the Act. In such cases, the lease extension must be done with the Land Registry through Surrender and Re-grant. This means the balance of the extended term will be subject to a ground rent of a peppercorn.

What are The Consequences of Non-Compliance?

If landlords demand ground rent in violation of this Act, they can still escape censure by returning the payment received from the leaseholder within 28 days. If they do not, a fine will be imposed on the landlord ranging from £500 to £30,000 per qualifying lease. The leaseholder holding a qualifying lease can apply for a declaration to the Property Chamber, also known as the First-Tier Tribunal. The declaration must mention that the ground rent is replaced with a peppercorn rent.

Commercial Concerns

Landlords must get familiarised with the key provisions of the Leasehold Reform Act. They can avoid incurring liability due to unintentional non-compliance.

The Act will NOT be applied retrospectively. Leases granted many years ago do not benefit, the ground rents will continue to rise for the duration of the lease. And, in this year of transition developers who had signed the leases before the Act came into force can argue that the ground rent rules don’t apply to them. This will be on the basis of the date of the ‘agreement for the lease’ or put simply when contracts were exchanged – the relevant date being 30 June 2022.

The Leasehold Reform Act is only one step in the Government’s broader leasehold reform scheme. It is expected that more measures could be included to cap ground rent.

A lease agreement signed after the Act was introduced will still have to comply with its provisions under an option of the Section 5 right of the first refusal, which existed before the Act. The Section 5 right of the first refusal ensures that Freeholders cannot sell the ground rents without first offering it to the existing leaseholders, save for where the agreement to sell the ground rents was entered into before the first lease was sold.

What’s Not Included In The Leasehold Reforms?

The new law has welcome changes. But they favour new leaseholders only. The 4.6 million current leaseholders in England want to know how the government will fulfill its promise of making lease extensions easier and cheaper. As there is no mention of the next phase of reforms, leaseholders will have to wait at least another year for the new reforms to be introduced in Parliament. Some of the critical issues to be addressed in the next phase of reforms are:

The 999-Year Lease

Currently, leaseholders can only extend the existing term by 90 years. Leaseholders were promised they could extend the lease to a 990-year term using a more simplified and transparent process. However, this change is not included in the current Lease Reform (Ground Rent) Bill.

Lease Extension Calculator

The Government has promised the introduction of a statutory calculation. It will provide an estimate of the premium for a lease extension for a property. The government can protect leaseholders from hassling and time-consuming negotiations by fixing the cost of extending a lease. This proposal does not feature in the Leasehold Reform (Ground Rent) Bill. Leaseholders are stuck with the current system in which professional advice is almost always a prerequisite.

Marriage Value

Marriage value is an issue of high significance for leaseholders where the lease is less than 80 years. Once a lease falls below 80 years extending it is more expensive as the marriage value becomes part of the calculation. Marriage Value equates to 50 percent of the increase in the property's market value when there is an extension of the lease. Removal of the Marriage value is not included in the Leasehold Reform (Ground Rent) Bill. In principle nor should it be as the Freeholder or competent landlord needs some compensation for his or her reversionary interest being diminished by the lease extension!

The Future Of Leasehold Reforms

No further leasehold reform is expected to come into force in the near future. The Government has promised to deliver the second part of the leasehold reform by 2024. It will help leaseholders control the management of their building. It will also ensure better protection as they can quickly take corrective actions when repairs or maintenance are needed.

The future leasehold reforms are expected to

- Simplify the valuation process of extending a lease or buying a freehold.

- Abolish marriage value which can result in an increase in property value on the lease extension.

- Introduce a separate valuation process for low-value properties.

- Provide leaseholders the option to buy out the ground rent without extending the lease term.

- Allow leaseholders to prolong the existing leases at zero ground rent for a period of 990 years.

BEWARE: Landlords asking for ground rent under a lease pre-dating the Act must be wary not to alter a lease inadvertently so that it amounts to surrender and regrant. As a re-grant after the Act has been enforced means its provisions would apply to the re-grant.

ENFORCEMENT: Enforcement action can be initiated against the past and current landlords or other persons representing them. Due diligence inquiries must include the likelihood of past landlord liability when purchasing land subject to long residential leases.

References:

https://www.birketts.co.uk/legal-update/an-overview-of-the-leasehold-reform-ground-rent-act-2022/

https://www.landlordtoday.co.uk/the-big-issues/2022/6/leasehold-reform-ground-rent-act-2022-what-you-need-to-know

https://www.michelmores.com/news-views/news/ground-rent-and-leasehold-reform-ground-rent-act-2022

https://www.jdsupra.com/legalnews/leasehold-reform-ground-rent-act-2022-5413151/

https://www.mondaq.com/uk/landlord-tenant--leases/1221670/an-outline-of-the-leasehold-reform-ground-rent-act-2022

Consequences of Non-Compliance with Ground Rent Regulations

The consequences of not adhering to the new ground rent rules outlined in the Leasehold Reform (Ground Rent) Act 2022 can be significant for landlords. If landlords attempt to collect ground rent in violation of the Act, they risk facing fines ranging from £500 to £30,000 for each qualifying lease. To avoid this, landlords must act swiftly to ensure compliance by returning any payments received in violation of the new rules within 28 days. Leaseholders also have the right to apply to the Property Chamber for a declaration to replace ground rent with a peppercorn rent, which could further complicate matters for landlords failing to comply.

The Future of Leasehold Reforms and What’s Next

While the Leasehold Reform (Ground Rent) Act 2022 marks a significant step in addressing unfair ground rent practices, it is only part of the broader leasehold reform agenda. Leaseholders eagerly await the next phase of reforms, which are expected to focus on simplifying lease extensions and making the process more affordable. The government has committed to introducing changes by 2024, which could include a more straightforward method for extending leases, abolishing marriage value, and providing leaseholders with the ability to buy out their ground rent entirely. These reforms aim to further protect leaseholders and offer greater control over their properties in the future.