The Leasehold Reform (Ground Rent) Act 2022: what is the aim, what will it apply to and what will it mean?

What is the aim?

The Leasehold Reform (Ground Rent) Act 2022 (“The Act”) which came into force on the 30th June 2022 is, according to the Government, the first step in their aim to make leasehold property ownership "fairer and more transparent for millions of future leaseholders". However, as we will explore below, it is not yet clear whether this will be fully achieved.

So what is the objective of the Act, what does it mean for people looking to buy a leasehold property, and, crucially, for those who already own one?

The Act distinguishes between regulated leases governed by the new regulations and excepted leases which are not.

The objective of the Act is to effectively bring ground rent payments on new residential long leases (a lease with a term of more than 21 years) for properties in England and Wales to an end. The ultimate aim being to fulfil the government’s pledge to set future ground rents to nil.

Which leases will The Act apply to?

The Act will apply to new, residential long leases that are entered into any time from the 30th June 2022.

Put simply, the Act will ensure anyone buying a leasehold property on or after 30 June 2022 cannot be charged ground rent. There is a significant exception to this rule however in that a transition period applies to regulated leases of retirement homes. This is effectively a “U” turn as originally these were to be fully excluded. The Act will not come into force for these leases any earlier than 1 April 2023.

The Act will not apply retrospectively, so it will not affect leases that are already in existence. However, if an existing lease is surrendered and re-granted, it may still be caught, with the new regulations surrounding ground rent kicking in. Landlords will need to be careful not to contravene the regulations when re-granting or extending the terms of an existing lease for example by adding additional land which may cause it to be brought under the Act. This is where sound legal advice should be sought.

Leases that are excluded from the Act are set out below:

Excepted leases

• Business leases. “Business” is defined as including a trade, profession or employment but excludes home business use.

• Statutory lease extensions under the Leasehold Reform Act 1967 (for houses) or Leasehold Reform, Housing and Urban Development Act 1993 (for flats).

• Community housing leases and lease structures for funding purposes. These are defined in the Act and are subject to further regulations.

• Shared ownership leases. Where the tenant's interest in the lease is less than 100%, the payment of a peppercorn rent will apply in respect of the tenant’s share, however the landlord can continue to charge an additional rent in respect of its share.

What will it mean for both landlords and existing leaseholders?

Previously, expensive ground rent fees have caused problems for owners of leasehold properties, particularly where the fees have increased markedly year on year. The Act will put an end to this for anyone entering into a new lease, ensuring that they cannot be charged more than a peppercorn rent. There is however no obligation on a landlord to levy this at all.

The new regulations will of course apply however if a Landlord decides to grant a new lease and accordingly they should review the ground rent clause in any of these leases before entering into them so that they don’t fall foul of the Act. A landlord will be liable to receive a financial penalty of between £500 -£30,000 (imposed by the local weights and measures authority) if they breach the new rules. Again, this is where sound legal advice will be key.

In particular, property developers developing property that they intend to sell as individual leasehold properties will need to ensure that they have sought the correct legal advice when creating new residential long leases to ensure that they are compliant. If the new lease demands ground rent, it must not be for more than one peppercorn per year and, crucially, no admin fees should be charged.

As set out above, the Act only applies to the majority of new residential long leases on or after 30 June 2022, so will not change the terms of an existing lease. However, this area of reform is still a moving feat and the government intends to address ground rent under existing leases in the future.

Overall the Act is to be welcomed, however, unless enfranchisement is also reformed, new leases paying a peppercorn will be more sought after than older leases with higher ground rents. Those with older leases would only be able to reduce the ground rent to a peppercorn if they enfranchise and, as the calculation of the premium is linked to the ground rent, doing this could wind up being very expensive under the current regime. A further concern is that landlords will potentially be able to exploit a loophole in the definition of the word “rent” namely by charging a ground rent under another name. It seems that the peppercorn is finally on the up, however it remains to be seen how this will play out in practice.

Further guidance can be sought by reviewing the Government user guide via the following link

Rebecca Buttle, Head of Conveyancing Eatons Solicitors