Bill to reduce residential ground rents progressing through parliament

The Leasehold Reform (Ground Rent) Bill has received its second reading in the House of Commons and has now progressed to the committee stage. If the bill receives royal assent, it will make significant changes to when ground rent can be charged on residential dwellings, which will impact both developers and landlords.

It is common for owner-occupied flats and houses in England and Wales to be held on long leases. These leases typically have terms of 99 years or more. The owner-occupier may be required to pay ground rent to their landlord and the lease will set out how the ground rent is calculated and reviewed at set intervals. Unlike service charges, landlords do not have to provide a service in return for ground rent payments.

In recent years, onerous ground rents have faced increased scrutiny, resulting in the introduction of the Leasehold Reform (Ground Rent) Bill to parliament in May. The aim of the bill is to tackle the practice of landlords and developers charging ground rents which become increasingly expensive over the term of the lease. For example, long leases of new build homes may contain a clause specifying that the ground rent will double every 10 years. Such practices have made it difficult for some leaseholders to sell their flats or houses.

The key points of the bill are:

• It will apply to most long residential leases, i.e. leases for terms exceeding 21 years, entered into in England and Wales after the bill comes into force. It will not apply to existing leases unless they are extended voluntarily, in which case ground rent must be set at a peppercorn – e.g. a nominal payment – once the extension starts. Commercial leases and some mixed-use leases will be exempt from the effect of the proposed legislation, although mixed-use developments containing separate leases for commercial and residential properties will not be exempt.
• Ground rent will be fixed at one peppercorn a year for these leases, meaning that there will be no meaningful financial value to the ground rent provisions contained within them.
• Enforcement will be undertaken by trading standards authorities, which will have the ability to fine landlords between £500 and £30,000 for breaches of the new ground rent rules. Leaseholders may also bring claims to the First-tier Tribunal for leases of property in England or the Leasehold Variation Tribunal for leases in Wales.
• Landlords may be ordered to repay unlawfully charged ground rent plus interest within 28 days.
• Landlords will be prohibited from charging administration fees in respect of ground rent.

Clearly, the proposals are qualified, however. While most new residential long leases will not be able to charge ground rent above a peppercorn moving forward, existing leases will continue unaffected. Many of these leases will have decades, if not centuries, remaining on their terms. Furthermore, the bill does not constitute an outright ban on the creation of new residential long leases of houses, which the government said it would implement following its 2017 paper ‘Tackling unfair practices in the leasehold market’.

This may be a point worth considering for residential developers. While the ability to charge any meaningful sum in ground rent has effectively been lost, the government has not followed through with its proposal to ban residential long leases of houses, suggesting they do still have a role to play in the housing market. That role may be one in which enfranchisement is ultimately encouraged, as the absence of onerous ground rent provisions is likely to provide potential future buyers of leasehold dwellings with easier access to mortgage finance.