The Ground Rent Act 2022
The Ground Rent Act 2022
On 8th February 2022 the Leasehold Reform (Ground Rent) Act 2022 (‘the Ground Rent Act’) received Royal Assent. It will come into force on 30th June 2022 and will restrict ground rents in applicable leases to a “peppercorn” (or NIL) ground rent. The Ground Rent Act has major implications for both Landlords and Tenants who are negotiating terms to “voluntary” leases.
The Ground Rent Act applies to:
Regulated leases: i.e., those granted for a term greater than 21 years in return for a premium. They include newly granted leases and leases extended on “voluntary” terms
Other leases (where no premium is paid) which when varied (e.g., the term, the demise or rent pattern) are considered deemed surrendered and regranted
Replacement Leases: an extended lease whose new term commences before the end of the existing term (e.g., a lease extension for 999 years from 1 Jan 2000 that substitutes a lease of 99 years from 1 Jan 2000). The ground rent of the existing lease continues until the expiry of that term (31 Dec 2098), then a “peppercorn” rent is only payable for the rest of the extended term
Shared Ownership Leases (the Tenant only pays a “peppercorn” rent for its share while the Landlord can continue to charge a ground rent for its share, until the Tenant staircases to 100% ownership)
The Ground Rent Act does not apply to:
Existing Leases that are not extended, nor varied
Extended Leases granted before the Ground Rent Act comes into force
A Contract to grant an extended lease that pre-dates the Ground Rent Act coming into force
Some business leases
Leases extended under the Leasehold Reform Housing and Urban Development Act 1993 (‘the 1993 Act’) (which already prescribes that the ground rent become a “peppercorn” rent on any claim)
Leases extended under the Leasehold Reform Act 1967
Community housing leases
Home finance plan leases
A lease of e.g., a garage (or other property not considered a dwelling).
Landlords face a civil penalty regime, including fines from £500 up to £30,000 should a lease contain a ground rent in contravention of the Act, or they fail to refund a Tenant the prohibited rent within 28 days of demand.
Tenants will have the right to enforce the provisions of the Act via Trading Standards or the First Tier Tribunal
There are a number of observations and consequences that need to be considered when negotiating terms:
Landlords and their Tenants alike need to be mindful when extending flat leases voluntarily outside of the statutory procedure set out in the 1993 Act and must carefully consider the provisions regarding replacement leases and negotiate the premium payable accordingly.
Landlords might be unaware that the ground rent income stream is terminated if they agree terms to vary a lease that is considered a deemed surrender and regrant (where no premium is paid). Landlords will also find themselves exposed to the risk of enforcement action if they then seek to collect any prohibited ground rent.
Landlords could seek an additional premium to reflect the income that would be lost from a modern ground rent in a new or extended lease. This will be a matter of negotiation with Tenants and subject to valuation advice
Landlords might be able to seek a modern ground rent for a Replacement Lease for the remaining term of the existing lease as that may not be caught by the Ground Rent Act
Landlords and Tenants may want to expedite existing deals or negotiations (which include a modern ground rent) before the Ground Rent Act comes into force. So long as they complete or enter a contract before the Ground Rent Act comes into force they will not be caught. Tenants could be attracted if they are offered a reduced premium in return (which for some could be more affordable than having to pay a higher premium for a lease when the Ground Rent Act comes into force).
Some landlords may wish to explore the possibility of agreeing an enhanced rent in lieu of a premium in order to avoid being caught by the Ground Rent Act.
Head Landlords need to be mindful that their income stream could diminish if they vary or extend an underlease but are still be obliged to pay ground rent to the superior Landlord in their headlease.
Tenants who collectively own the freehold to the building containing their flats still have options available to them to demand a ground rent as usually a premium will not be paid on the grant of a lease extension.
Landlords might wish to grant separate lease extensions for leases of property not classed as a dwelling (e.g., garage leases), as they would not (when not let with a flat) be caught by the Ground Rent Act.
Landlords and Tenants are encouraged to seek legal advice and contact Wallace LLP’s well-regarded Leasehold Enfranchisement Department at an early stage of negotiating terms, to establish the possible implications and consequences of the Ground Rent Act.
