New law on residential leases limits ground rent to a peppercorn

The new Leasehold Reform (Ground Rent) Act 2022 limits the amount of ground rent payable under most new long leases of residential properties to a peppercorn, and is the first of the UK government's two-part legislative programme to reform the leasehold system. It is described by the government as being "part of the most significant changes to property law in a generation". The Act came into force on 30 June 2022 (or 1 April 2023 for retirement properties). 

What does the Act do?

The Act brings to an end the practice of landlords reserving ground rents in long residential leases, making it unlawful to require a tenant to pay more than a peppercorn.

It prohibits landlords of regulated leases from charging their tenants a "prohibited rent",  save for shared ownership leases and where existing leases are extended consensually. A prohibited rent is any rent which exceeds a peppercorn. 

Anti-avoidance measures are included in the Act, such as a bar on landlords charging their tenants administration charges for the collection of ground rents. However, it does not affect landlords' rights to demand payments of insurance rent and service charge – even if they are reserved as "rent" – ensuring necessary estate management can continue for the benefit of residents.

When does it come into force?

The Act only applies to new leases granted (or under a contract in place before implementation) from 30 June 2022. 

There is no retrospective effect so ground rents under existing leases remain payable. While there was fierce criticism of this omission, the government (in Lord Greenhalgh's recent letter to the Association of Leasehold Enfranchisement Practitioners (ALEP)) again confirmed its commitment to introduce measures to simplify and standardise the lease extension process. The letter confirmed the government's view that the Act delivers the first of the two-part programme of leasehold reform and stated that within this Parliament the government intends to deliver the second phase of the programme.

Which leases are affected?

The Act applies to a "regulated lease". A regulated lease is a long lease (more than 21 years) of a single residential dwelling, granted at a premium on or after 30 June 2022. 

Shared ownership leases (where the percentage of the leasehold property owned by the tenant is less than 100%), are covered by the Act but are treated slightly differently. The peppercorn rent applies only to the tenant's share.

Excepted leases from the Act include business leases, community housing leases, home finance plan leases, or leases granted under the Leasehold Reform Act 1967 for houses or the Leasehold Reform, Housing and Urban Development Act 1993 concerning flats (which set out the two statutory lease extension regimes).

Where an existing lease is extended voluntarily (as opposed to under one of the statutory regimes), the landlord is permitted to continue charging the tenant the ground rent under the existing lease only up to the point when the extended part of the term commences. Once the tenant reaches what would have been the end of the original term, the ground rent must drop to a peppercorn.

If a variation of an existing residential long lease amounts to a deemed surrender and regrant, the regranted lease will become a "regulated lease" and therefore protected by the Act – this will occur whether or not the original lease was granted at a premium.

Consequences of non-compliance

Landlords who do not comply with the Act – by demanding payment of a prohibited rent or by failing to refund it within 28 days – can face fines which could be as high as £30,000 per lease. They will also be forced to refund to their tenants any prohibited rent, together with interest. 

 Osborne Clarke comment

The government has pledged to making "home ownership fairer and more secure" and the Act is one of the first (of potentially several) reforms as part of the "levelling up" agenda on the rental market and home ownership. The Housing Minister, the Rt Hon Stuart Andrew MP, in a recent speech to the Chartered Institute of Housing 2022 conference, spoke of the government's commitment to being a helping hand to the housing sector, addressing numerous measures already underway.

The Act has been passed in a specific attempt to address the controversy over highly criticised provisions in long residential leases, with clauses requiring tenants to pay high and often escalating ground rents.

It will take some time before it is clear what impact the Act will have on landlords. Many landlords already changed their standard lease terms before it came into force. However, it will be important for prospective landlords of new leasehold property to familiarise themselves with the provisions of the Act to ensure they do not face enforcement action for inadvertently demanding prohibited rent. 

Existing landlords who granted leases without escalating ground rent clauses will not be affected. However, a landlord demanding ground rent under a lease not caught by the Act should be careful not to vary the lease after the Act comes into force such that there is a deemed surrender and regrant – which would then be caught by the Act. 

The new requirements will no doubt be welcomed by prospective tenants of new long leasehold residential property. The Act, however, does not have retrospective effect, which effectively creates a two-tier system. Until future legislation is enacted, existing leaseholders are unable to secure peppercorn ground rents under the existing statutory lease extension regimes. 

In his letter to ALEP, Lord Greenhalgh stated that the government intends to introduce reforms covering enfranchisement valuation and steps to simplify the process to extend leases to an increased term of 990 years and ensure sufficient compensation is paid to landlords to reflect their property interests.  

While leaseholders will welcome the announcement as to the anticipated second stage of reforms, the precise measures are yet to be confirmed and how it will strike a balance between the interests of the parties remains to be seen.