On the 14th September 2021, the House of Lords undertook their third reading of the Leasehold Reform (Ground Rent) Bill. No further amendments were made following the Report Stage held on 20th July 2020. Now it is the House of Commons turn to consider the Bill and the long-awaited restructuring of the residential leasehold framework is edging closer.

What are Ground Rents?

Ground Rents are typically low annual payments that a leaseholder will pay to the freeholder of the property (i.e. their landlord) under the terms of their long residential lease. For a lease to be considered as a long lease, the contractual period must be for a period longer than 21 years from the date of grant. This low annual payment can either be a fixed amount or a variable amount by reference to an indexation.

In recent years, there has been a controversial trend arising whereby landlords are seeking to optimise their freehold value by including provisions that increase ground rent payments exponentially throughout the lease term. A hypothetical example would be a lease that requires the tenant to pay a ground rent of £250.00 annually, with a provision that requires the ground rent payment to double every five years. Whilst this may appear to be a relatively small payment at the beginning of the term, leaseholders may be being unaware of the future repercussions that may follow.

Why are these Ground Rents problematic?

Whilst it is clear that escalating ground rents can develop into a significant financial burden, there is also a knock-on effect in relation to lender security. Under the terms of a typical long lease, a landlord may forfeit the lease if the leaseholder is 21 days in arrears. If this happens, the court may grant relief from forfeiture so long as the arrears are paid off. If the leaseholder cannot pay off the arrears, the lender may do so by recovering the costs directly from the leaseholder and, in turn, protect its security.

However, a long lease may be considered an assured tenancy under the Housing Act 1988 if, among other factors, the ground rent is in excess of £250 (or £1,000 in London). If this were the case, the court is obliged to make an order for possession in the event of arrears. This poses a greater risk to lender’s security, to the extent that lenders are refusing to grant loans (e.g. a mortgage) in respect of these long leases. As a result, these escalating ground rent provisions have severely affected the capital value and marketability of these properties, leaving tenants trapped within their leases whilst struggling to keep up with rising rent demands.

How does the proposed bill attempt to deal with this issue?

The Leasehold Reform (Ground Rent) Bill was introduced by Parliament in May 2021, with the aim to regulate future long residential leases exceeding 21 years (“regulated leases”) that are granted on and after the date the Bill comes into force. The Bill’s main intention is to restrict the payments of rents in these regulated leases to one peppercorn per year, so as to restrict the monetary value of ground rent payments to a nominal rate. No administration charges may be attached to these regulated leases either, which is to prevent Landlord’s from finding a way around the Bill.

Are there any concerns with the proposed Bill?

As soon as the original drafting was published, there were various concerns that the Bill may inadvertently do more harm than good. However, the House of Lords have attempted to address this during the Report Stage and have proposed further amendments. Overall, out of the 46 amendments proposed, there are 5 key amendments that should be noted:

  • The original drafting did not differentiate between ground rent and other types of rent reserved by the lease. This posed a risk that landlords will not be able to recover other types of rent such as service charge and insurance rent for more than a peppercorn. A new clause was added to rectify this issue, by distinguishing ground rents from other types of sums that are reserved as rent under the lease.

 

  • The Bill’s applicability has been narrowed so as to only apply to long leases that are “single dwellings”. This is because there were concerns that the Bill unfairly restricts legitimate commercial arrangements in the case of multiple dwellings. An example of this would be a lease for multiple dwellings and a business has a lease of part within that building. If an arrangement such as this were caught under the definition of a “regulated lease”, this could restrict the commercial arrangements that may otherwise be in the leaseholder and superior landlord’s best interests.

 

  • The Bill has also been amended to apply only to leases that are granted in exchange for a “premium”. The purpose of the Bill is to protect leaseholders who pay a substantial premium on the granting of a lease (often with a mortgage) from further rent charges, and this amendment makes this clear.

 

  • An obligation on the landlord to notify the leaseholders of the upcoming changes to ground rents has been added. This is to prevent landlords from deceiving leaseholders into entering into a lease extension before the changes in the Bill are implemented.

 

  • The penalty for landlords that (a) require a tenant to make a ground rent payment; or (b) breach their duty to inform a tenant of the upcoming law changes to ground rents have been amended to between £500 and £30,000. The maximum penalty has been increased so as to be in line with the Tenant Fees Act 2019. This also acts as a greater deterrent against freeholders who attempt to breach this legislation because they view the fine as insignificant.

Of course, the Bill’s latest drafting is yet to be finalised. The House of Commons will review and scrutinise the latest draft, which may lead to future amendments being added. Nevertheless, it is clear that change to the law is fast approaching.

If you are a leaseholder, and require some assistance relating to your lease extension, please do get in touch with our commercial property team contact Ellen Petersen on 01206 835316 or email [email protected].