In the first part of a long-heralded suite of reforms to leasehold property law in England & Wales, the UK government has introduced a draft Bill which is intended to consign to history ground rents under leases of flats and houses.
A ground rent is a sum of money paid by a residential long leaseholder, usually on an annual basis, under the terms of their lease. It might be a fixed amount or engineered to rise over time, whether by a specific amount or by reference to indexation.
Ground rents represent income on a property investment in the hands of the landlord and have for some time been an important part of many private house building schemes, where the investor funding the scheme relies on the ground rent income.
But ground rents have for one reason or another come in for increasing criticism in recent years. First, the tenant does not receive any additional benefits from paying the ground rent: it is just a cost. Second, leases are by their nature a depreciating asset. As the years tick away, the lease become less valuable but the tenant still has to pay the ground rent. Third, there have been well-publicised instances of alleged abuse, with some landlords tying unwitting tenants in to leases with extremely high or exponentially rising ground rent liabilities.
It was back in 2018 that the UK government first consulted on various aspects of residential property reform including a ban on new leasehold houses, a cap on ground rents, and shaking up enfranchisement and commonhold laws, but progress has been slow until the start of 2021, when there was a flurry of announcements including the establishment of new commonhold councils.
In the first stage of its proposed reforms, the government has firmly committed to “set future ground rents to zero”, and on 12 May, the Leasehold Reform (Ground Rent) Bill was introduced in the House of Lords.
The draft Bill in its current form prohibits the grant of new long leases (i.e. leases of 21 years or more) ("Regulated Leases") with a ground rent of anything more than a peppercorn. Landlords found to have breached the new law will be liable to pay fines of £5,000, and tenants will be able to apply to the First Tier Tribunal for an order that unlawful ground rents paid to their landlord or a preceding landlord are refunded. At present the Bill looks like it could capture a range of charges other than ground rent, which does not seem to be the intention behind the Bill and we assume that will be corrected in due course.
The draft Bill excludes shared ownership leases from the reform. These are a species of lease where the tenant buys a share in the property without owning it outright, and pays a rent to the landlord until they have staircased up to 100% ownership. The rent is a necessary part of this process. There are also exceptions for social housing leases and lease structures used for specific funding purposes such as Sharia finance. In contrast, retirement property will not be immune to the ground rent cap, though the new law will not apply to retirement properties before April 2023.
Ground rents under existing leases will be unaffected, though transitional provisions deal with situations such as the grant of a new lease following the expiry of an existing one. There are also anti-avoidance provisions, so that ground rents are not disguised as other charges and fees, and leases granted after the legislation has been enacted pursuant to agreements exchanged before that date will be caught by the new law.
The housing development and residential investment sectors have had several years to prepare for this significant change in the law. Criticisms of onerous ground rents has been circulating in the market for many years, and for some time a number of major lenders have refused to lend against leases affected by increasing ground rents. The Law Commission’s recommendations and government announcements in recent years have foreshadowed legislative change which is finally being realised through this draft Bill and the promise of more reforms in the pipeline.
Developers of new housing will have to rely on funding structures which encourage investment notwithstanding the absence of a reliable ground rent return. The industry will have to find inventive solutions, because neither the government nor other stakeholders will want the abolition of ground rents, a reaction to perceived abuses of a longstanding feature of the residential market, to adversely affect the future supply of much needed housing stock in the UK.