Leasehold Reform (Ground Rent) Bill receives Royal Assent

Residential leaseholds have been the subject of many consultations, research papers and announcements in recent years, which has made it increasingly difficult for even the most studious landlords to keep abreast of all their changing duties and responsibilities.

The latest development concerns the Leasehold Reform (Ground Rent) Bill which formally became law after receiving Royal Assent on 8^th February 2022. This is promised to be the first step in a wider reform of residential leaseholds, with many expecting statutory leasehold extensions and enfranchisement to be next.

Summary of the Reforms

The primary reform contained in the Leasehold Reform (Ground Rent) Act 2022 (LRGRA 2022) will limit the ground rent chargeable on most new long residential leases to one peppercorn per year. A ‘peppercorn’ will allow a nominal value to continue (as all leases must have some rent), whilst at the same time meaning leaseholders will not actually have to pay the landlord as a peppercorn has virtually zero financial value.

There are further restrictions on ground rent, as the LRGRA 2022 will also prohibit any payment of administration charges in relation to these peppercorn rents.

Special rules will also apply to shared-ownership leases and leases that replace pre-commencement leases including:

• In the case of shared-ownership leases, only the share owned by the tenant will be a peppercorn rent, whilst the landlords’ share remains unaffected by LRGRA 2022; and

• In a case where the term of a new lease overlaps with the remaining term of the original lease that pre-dates the commencement of LRGRA 2022 (which does occasionally happen), a landlord can charge the same rent as the original lease (but not more). Once the term of the original lease ends, only a peppercorn rent can be charged for the new lease.

To which Leases do the Reforms Apply?

Subject to exceptions (which we are happy to discuss further with affected landlords), the ground rent restrictions will apply to leases of dwellings (both houses and flats) granted on or after commencement of the relevant provisions (see below for the different commencement stages). This means these restrictions will not apply retrospectively, unless earlier leases contain renewal options or a right of first refusal, which will be a relief to landlords.

Certain types of leases are not subject to the ground rent restrictions: business leases (as defined in the Landlord and Tenant Act 1954), statutory lease extensions of houses and flats, community housing leases, and home finance plan leases.

Commencement

The LRGRA 2022 will be brought into force at different stages:

• The main provisions (including the ground rent restrictions) will come into force on a date or dates to be specified by the Secretary of State in regulations. The Secretary of State may appoint different days for different purposes, including for different kinds of leases. At present, those regulations have not been issued; and
• The sections coming into force on Royal Assent are sections 2 and 9 (for the purpose of making regulations) and sections 20-26 (interpretation and other general provisions).

The LRGRA 2022 has not been fully commenced because time is needed to prepare the regulations. The Minister of State for Building Safety and Fire, Lord Greenhalgh, has given a commitment that the provisions of LRGRA 2002 will be fully implemented within six months of Royal Assent.

The one exception to the aim to implement all of LRGRA 2022’s provisions within 6 months are retirement home leases, which must not come into force before 1 April 2023. This is intended to give the retirement sector additional time to transition.

Enforcement

As to enforcement of LRGRA 2022, Trading Standards authorities will be able to impose financial penalties of between £500 and £30,000 for breaches of the LRGRA, depending on the seriousness of the breach.

Leaseholders will also be able to recover unlawfully charged ground rents through tribunals in England and Wales.

This is the first of many changes that landlords and tenants can expect, with significant financial risks attributed to non-compliance.

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.