Leasehold Reform (Ground Rent) Bill 2021-22

The Leasehold Reform (Ground Rent) Bill 2021-22 seeks to restrict ground rents on newly created long leases of houses and flats to an annual rent of one peppercorn (a token of no financial value).

The Bill was introduced in the House of Lords on 12 May 2021. Having progressed through the House of Lords, it received its first reading in the House of Commons on 15 September 2021 and second reading on 29 November 2021. Report stage is scheduled for 24 January 2022.

Ground rent issues

In England and Wales, most owner-occupied flats are owned on a long leasehold basis. All shared ownership properties (which are part owned and part rented) are sold on a long lease. Houses can also be owned on a long lease.

Long leases normally require the leaseholder to pay ground rent to their freeholder or landlord. The lease agreement will set out the amount of ground rent payable and the basis for increases over the term of the lease. The landlord is not required to provide a service in return for ground rent.

In some cases, the rights to receive ground rents from leaseholders have been bought and sold in the financial market as a long-term income stream for third party investors.

Historically, ground rents were set at a ‘peppercorn’ or nominal level. However, in recent years a practice has emerged of selling properties on long leases with higher ground rents at the start and shorter ground rent review periods. As a result, long leaseholders can quite quickly face onerous and unsustainable ground rents.

High and escalating ground rents can make it difficult for leaseholders to sell or re-mortgage their property. Onerous ground rent terms can also have an adverse effect on leaseholders’ ability to buy their freehold or to extend their lease. This is because the ground rent charged is a factor in the valuation process.

The Bill

The Bill applies to England and Wales. Its provisions, once in force, will restrict ground rents on newly created long residential leases (with some exceptions) to a token one peppercorn per year. This effectively restricts ground rents to zero financial value. The intention is to make leasehold ownership fairer and more affordable for leaseholders.

The Bill places a duty on local weights and measures authorities (trading standards authorities) in England and Wales to enforce the Bill.

A breach of the ground rent restriction will be a civil offence for which enforcement authorities can impose a financial penalty of between £500 and £30,000. The money raised through financial penalties may be kept by authorities to fund their enforcement activities. They will also have the power to order the repayment of any unlawfully charged ground rent, plus interest, to leaseholders.

The Bill also prohibits the charging of administration charges in relation to peppercorn rents and makes provision for leaseholders to recover unlawfully charged ground rents through the First-tier Tribunal in England or the Leasehold Valuation Tribunal in Wales.

If enacted, the main provisions of the Act will come into force on a date to be specified by the relevant Secretary of State. But for retirement home leases (a lease relating to a dwelling that can only be occupied by people aged 55 or over), the Act’s provisions must commence no earlier than 1 April 2023. This is intended to give the retirement sector, where ground rents are often used to help fund the additional costs of providing communal spaces and facilities, additional time for transition.

The Bill, together with its Explanatory Notes, Impact Assessment and transcripts of the parliamentary stages are available on the Parliament website: Leasehold Reform (Ground Rent) Bill [HL].

Comment

The Bill has been widely welcomed as a positive first step in leasehold reform.

Nevertheless, several issues have been raised during the Bill’s passage through the Lords and the Commons, including:

• the Bill will only apply to new leases and will not assist existing leaseholders faced with high and escalating ground rents;
• the lack of a firm timetable for the more substantive second part of leasehold reform legislation;
• concern that unscrupulous freeholders may pressurise leaseholders to agree voluntary lease extensions before the Act is fully in force, as a means to continue their ground rent arrangements;
• concern that trading standards authorities face budgetary pressures and may not have capacity to enforce the new legislation;
• the broad definition of ‘ground rent’ in the Bill; and
• the Bill’s commencement date and the transition period for leases of retirement homes.

Leasehold reform

The Government has committed to comprehensive reform of the leasehold system. The Leasehold Reform (Ground Rent) Bill 2021-22 is the first part of this process. A bill on broader leasehold reform is expected in the third session of this Parliament. The Commons Library briefing, Leasehold and commonhold reform, provides further information on the Government’s leasehold reform proposals.