The end of escalating ground rents?

So what is a ground rent?

  • it’s a recurring charge that Leaseholders pay to their Landlord (a Leaseholder has an exclusive right to live in a property, usually a flat, for a period of time)
  • no services are provided by the Landlord in return (it’s different from a service charge)

What’s the problem?

A Leaseholder doesn’t own their flat for ever. When their lease ends, it reverts to their Landlord (the Freeholder). Leases can last a very long time eg. 100 years and they are bought and sold, just like Freehold interests. Escalating ground rents decrease the value of Leases making them harder to sell and get a mortgage.

How’s the Government trying to fix the problem?

On 30th June 2022, new  ground rent restrictions come into force. They will limit the ground rent that can be charged under most new long residential leases to ‘a peppercorn’ (effectively zero) each year.

Landlords will also be banned from charging administration fees for collecting the ‘peppercorn rent’, preventing Landlords from trying to make a similar charge by another route.

What leases does the new law apply to?

  • New “regulated” leases which are:
    • over 21 years;
    • for a single dwelling;
    • granted for a cost; and
    • commence after 30th June 2022.

And what leases aren’t covered?

  • Existing leases (but see ‘Lease Extensions’ below)!
  • Statutory lease extensions.
  • “Excepted Leases” which include: some business leases; community housing leases; and home finance plan leases.

The ban on Landlords charging ground rent on new residential leases will also eventually apply to retirement homes. This is expected after 1st April 2023 and further details will be released. Different rules apply to shared ownership leases and these complex rules are not covered here.

Lease extensions

The default is that the new rules apply only when the period of time in the original Lease ends, even if the Lease is extended by agreement before it was due to end.

For example, if a Lease with a term of 100 years is extended for a further 100 years in year 90 of the original term, the lower ground rent won’t kick in until 10 years into the extended Lease. Like all things, this can be a negotiation point.

BE AWARE!

With fines up to £30,000 Landlords need to take care not to break the rules by mistake. Equally,  Leaseholders need to make sure they sign up to a Lease with a peppercorn ground rent. As always, both parties need to take specialist advice and please contact our team.