The end of residential ground rents comes into force on 30 June 2022

Described by the government as “part of the most significant changes to property law in a generation”, the Leasehold Reform (Ground Rent) Act 2022 (LRGRA 2022) received Royal Assent on 8 February 2022 and marks the first of a series of anticipated leasehold reforms. The Act applies to all new residential long leases being granted, and voluntary lease extensions where the existing lease is surrendered and regranted.

The LRGRA 2022 effectively abolishes ground rents under new long residential leases which are granted for a premium. Annual ground rents on these new long leases will now be restricted to a token peppercorn rent, meaning that any new ground rents will have no financial value, nor will landlords be able to apply “administration” charges in relation to the peppercorn rent.

The Secretary of State has recently announced that the main provisions of the LRGRA 2022 – the abolishment of ground rents in residential leases – will come into force on 30 June 2022. It is important to note that the Act will not have retrospective effect and therefore, any existing leases currently being negotiated which are subsequently varied (resulting in a deemed surrender and regrant) after the LRGRA 2022 has come into force, will be captured. Accordingly, ground rent will be removed from the date of the variation.

Statutory leases under the Leasehold Reform Housing and Urban development Act 1993 (1993 Act) and the Leasehold Reform Act 1967 (1967 Act) are also excluded. However, this legislation already imposes a peppercorn ground rent as a term of the new lease.

Certain types of leases are also excepted by the LRGRA 2022 such as business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases. The LRGRA 2022 will not apply to leases granted under contracts entered into prior to the commencement of the Act, unless in accordance with an option or right of first refusal.

Special rules will apply to shared ownership leases and leases that replace pre-commencement leases (e.g. voluntary lease extensions under Part 1, Leasehold Reform Act 1967 or Chapter 2, Part 1, Leasehold Reform, Housing and Urban Development Act 1993). For retirement homes, the provisions will come into force no earlier than April 2023.

Breaches of the LRGRA 2022 attract financial penalties of between £500 and £30,000 per qualifying long lease and are to be enforced by Trading Standards. Landlords will therefore need to be cautious when proposing terms.

Any ground rent collected in breach of the provisions of the LRGRA 2022 must be returned within 28 days of the demand for payment.

As a landlord or developer, the timescale for implementation leaves little scope for putting transitional arrangements in place. Several house builders have already adapted their practices in anticipation of the LRGRA 2022, and are no longer imposing ground rents in new long leases that have been granted.

The LRGRA 2022 aims to address issues that leaseholders have been facing with adverse and unaffordable ground rent provisions. Until further legislative changes are proposed, there may be the emergence of a hybrid leasehold property market. Existing leases which include a ground rent will be less attractive to purchasers, compared to new leases without, and could become unmarketable.

For more information on the LRGRA 2022 or to discuss an issue with ground rents, please contact Katie Cohen.