From 30 June 2022, anyone buying a new long residential lease in England or Wales (which has been granted for a premium) will not be charged ground rents under the Leasehold Reform (Ground Rent) Act 2022.
Ground rents are often found in long leases (granted for a term of more than 21 years) and are annual payments a tenant must make to its landlord, which gives the landlord an incentive to retain some interest in the property. Some leases contain mechanisms for ground rents to increase over decades which can make the payments quite substantial. This has become problematic for prospective purchasers who cannot get funding as banks are refusing to lend because of the increased liability of ground rents.
Following a consultation on leasehold reform undertaken in 2018, (the subject of our previous blog post on the Government response), this change has been introduced to make leasehold ownership fairer and more transparent for tenants.
The Act will only affect new leases and not existing tenancies. If a new lease is granted, or the term of an existing lease is extended, or additional land is added to the demise (a deemed surrender and regrant), a landlord will need to ensure that no ground rents are charged, or they may face penalties of up to £30,000.
A new long residential lease can make provision for collection of a ground rent, but this must be a peppercorn rent (which has no value). If a landlord can recover administrative charges from the tenant, these cannot relate to any collection of the ground rent.
This change is part of the Government’s wider focus on leasehold reform to create a fairer housing system. The Government is also considering reform of the enfranchisement rules (which govern the extension of a lease or the purchase of the freehold), and right to manage (taking control of the management of their building). Further changes on leasehold reform are not expected until next year.