10.02.2022
Understanding The Leasehold Reform (Ground Rent) Act 2022
The Leasehold Reform (Ground Rent) Act (“Act”) represents the first stage of the Government’s stated aim to “make leasehold ownership fairer and more affordable for leaseholders”.
On 8 February 2022 the Act received Royal Assent with Lord Greenhalgh promising commencement within six months, but this may happen sooner than six months.
Our leasehold specialist team have reviewed the legislation and have summarised the main points below:
Key points:
- Ground rents exceeding the permitted rent (normally a peppercorn) on new leases (“Regulated Leases”) are prohibited from the commencement date of the Act.
- Commencement will be within six months, but may be very soon.
- Does not affect properties where contracts have exchanged prior to commencement of the Act.
- Commencement for Retirement Properties will not be until after 1st April 2023.
- Statutory Lease Extensions are not Regulated Leases.
- A deemed surrender and regrant will amount to a Regulated Lease, but there are special provisions relating to permissible ground rent.
- A duty by the landlord to inform the tenant of the provisions of the Act before negotiating a lease extension was removed from the Act.
The key provisions of the act
The landlord of a Regulated Lease must not require the leaseholder to make a payment of a prohibited rent.
To understand how this provision will operate we need to understand the meaning of the following terms: ‘Regulated Lease’, ‘Require’ and ‘Prohibited Rent’.
What is a regulated lease?
The regulated lease is defined in the Act as one which meets all the following conditions:
1. Regulated Lease: The Type of the Lease/Property
A Regulated Lease must be a long lease of a single dwelling.
At its simplest this means long leases and not tenancies.
The word ‘single’ was added during the legislation’s journey through Parliament and provides clarification that head leases of multiple properties will not be considered a regulated lease and therefore ground rents can still be imposed. Headlessees may need to consider their position as they could be charged ground rent by landlords which they cannot recover from individual leaseholders.
A dwelling is defined as “a building or part of a building occupied or intended to be occupied as a separate dwelling, together with any yard, garden, outhouse and appurtenances belonging to it or usually enjoyed with it.” This could mean that a stand-alone lease of a parking space or garage which is not connected to the lease of the dwelling itself will not be classified as a Regulated Lease and ground rents could still be charged.
2. Regulated Lease: Premium
The requirement for a regulated lease to be granted for a premium was added to the Act during its course through Parliament. Premium is defined as any pecuniary consideration for the grant of a lease, other than rent.
3. Regulated Lease: When the lease is granted
The lease must be granted on or after the day on which the Act comes fully into course in relation to leases of that kind.
The commence date for Retirement Properties will not be before 1 April 2023.
The granting of leases where contracts are exchanged prior to the commencement of the Act will not be Regulated Leases and the ground rent provisions can remain.
4. Regulated Lease: Not an excepted lease
Some leases are excepted leases, which mean they cannot be Regulated Leases. These are as follows.
- Business Leases- the lease must expressly permit the property to be used for business purposes without further consent from the Landlord. The nature of the business purposes is such that the use of the property as a dwelling significantly contributes to the business purposes and the landlord and tenant must serve notices on each other setting out their intention to use the property for the business purpose.
The business does not include a home business.
- Statutory Lease Extensions- this includes leases granted pursuant to the Leasehold Reform Act 1967 (lease extensions for houses) and the Leasehold Reform, Housing and Urban Development Act 1993 (as amended) (lease extensions for flats). In any event, lease extensions under these statutes would result in a peppercorn ground rent.
- Community Housing Leases
- Home finance plan leases
Require
‘Require’ - is asking the tenant for the payment or having received the payment, failing to refund it to the tenant within 28 days.
Prohibited rent
A prohibited rent is one that exceeds the permitted rent.
The concept of rent is clarified by the Act as “a sum expressed to be payable in respect of rates, council tax, services, repairs, maintenance, insurance or other ancillary matters is not rent for the purposes of this Act merely because it is reserved as rent in the lease.”
The general rule for a permitted rent is a peppercorn rent which means an annual rent of one peppercorn, having no financial value.
There are two exceptions to the general rule: shared ownership leases and replacement leases.
1. Deemed Surrender and Regrant
A Regulated Lease includes a lease granted by virtue of a variation which gives rise to a deemed surrender and regrant. This is the case even if no premium is payable for the variation.
A variation of a lease which affects the term or alters the demise is, by operation of law, a deemed surrender and regrant. How the deed is named is immaterial. We often see ‘deeds of variation which seek to change the term of the lease or demise granted, but these are in fact deeds of surrender and regrant and so, for the purposes of the Act, would be Regulated Leases caught by the Act. These could however, also be replacement leases (see section below).
2. The Parties
A landlord includes a person who has ceased to be a landlord, i.e. may have sold their interest.
A tenant includes a person who has ceases to be a tenant, who is acting on behalf of a tenant or a guarantor of the tenant.
3. Shared Ownership Leases
In a shared ownership lease, the tenant will not own 100% of the value of the lease.
The tenant’s share is either the initial share they have purchased or the initial share plus any further percentages acquired through a process known as staircasing.
The tenant usually pays a ground rent to the landlord for their share and a market rent for the share which is still owned by the landlord. Under the provisions of the Act, the ground rent for the tenant’s share must be a peppercorn but the rent for the landlord’s share is not affected.
4. Replacement Leases
A replacement lease is:
- the granting of a new lease to a tenant of an existing lease which consist of, or includes some or all of the premises demised by said existing lease; and
- said existing lease must have been granted before the commencement date of the legislation; and
- the new term must begin before the end of the term of the existing lease; and
- must meet the requirements of a Regulated Lease (as above).
For replacement leases, the term can be split into two parts.
- The ‘excepted period’ which runs from the first day of the replacement lease and ends with the last day of the term of the original lease.
- The ‘regulated period’ which begins immediately after the excepted period and runs the remainder of the term of the replacement lease.
For the excepted period, the permitted rent cannot exceed that which is reserved by the original lease.
For the regulated period, the permitted rent cannot exceed a peppercorn.
Worked example:
A lease is granted for 99 years from 2 January 2000, expiring on 1 January 2099 and reserving a ground rent of £100 per annum. A lease extension is agreed, resulting in a replacement lease. The new term is 999 years from 2 January 2000.
The excepted period will be from 2 January 2000 to 1 January 2099 and for this period, the landlord can require payment of £100 per annum.
The regulated period runs from 2 January 2099 until 2 January 2999 and for this period, the ground rent must be a peppercorn.
Deemed Surrender and Regrant which does not increase the term
Care should be taken when considering a deemed surrender and regrant which does not extend the term. For example, if a landlord has agreed to extend the demise allowing the tenant to use a garden. This would amount to a deemed surrender and regrant but not a replacement lease, as it would not fulfil (iv)(c) above. This means that the landlord would lose all the ground rent.
This was discussed in the House of Lords and two resolutions were proposed:-
1. to have two leases – leaving the existing one in place and a new lease (without ground rent) for the new part demised; or
2. extend the term by one day.
The first option may give rise to practical difficulties and the second option may not be possible if there is a superior lease which lacks sufficient term. We would strongly advise that you seek specialist legal advice to ascertain how best to proceed in these circumstances.
Administration charges
The landlord cannot claim administration charges for the collection of ground rent when the said ground rent is restricted to a peppercorn.
Enforcement and Penalties
The legislation will be enforced by Trading Standards.
Enforcement proceedings may result in a penalty of between £500 and £30,000.
The maximum penalty was increased during the legislation’s journey through Parliament, which was originally £5,000.
The tenant also has rights, separate from the enforcement, to apply to the First-tier Tribunal to claim a refund of the rent, together with interest and costs. The enforcement authority may assist the tenant in making their application.
Note prepared by Hayley Bruce, Practice Development Lawyer in the Residential Property Team at Irwin Mitchell.
Last Reviewed: 10 February 2022
Disclaimer: This note has been prepared on the basis on the law as at February 2022, what is good practice and our understanding of issues common to landlords and leaseholders. It is a guide and not intended to be comprehensive reference material. It may not take into account changes in the law after the last review date noted below. It may not be suitable for your circumstances and should not be considered as a substitute for the advice of a lawyer. You agree to use this document at your own risk in these respects.
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