The reforms in ground rents contained in the Leasehold Reform (Ground Rent) Act 2022 will shake up the rules for ground rents on residential leases. Going forward, leaseholders will (subject to a few exceptions listed below) effectively pay nothing in respect of ground rent on new or replacement leases. We summarise everything landlords need to know about this new legislation.

Why do we need new rules?

Since the 1980s, there has been a growing movement for developers to charge a ground rent on leases, enabling them to create an additional revenue stream from the property. The large ground rents resulting from escalation clauses contained in such leases made selling properties and obtaining mortgages on them more difficult. At the same time leaseholders faced the risk of losing their properties through forfeiture for non-payment of ground rent.

Where and how does the reform apply?

Coming into effect on 30 June 2022, the Leasehold Reform (Ground Act) Act 2022 will apply to long leases (those over 21 years) unless it is an excepted lease, namely:

• A business lease
• Statutory lease extensions
• Community housing leases
• Home finance plan leases (including rent to buy arrangements).

As from 30 June 2022, the ground rent on new houses and flats will be charged at one peppercorn, which will effectively mean nothing is paid on ground rent. This will also apply to voluntary extensions, albeit the new rules will only apply for that part of the new lease term from such time as the original lease term would have ended.

For retirement homes, the changes won’t come into effect until 2023 to ensure the current production of retirement property.

The reform will have no retrospective effect for either residential or retirement home leases.

What happens if ground rents are being charged after 30 June?

Landlords could face fines between £500 and £30,000 (increasing for regular offenders) and will be asked to repay the ground rent with interest.

Conclusion

Ground rents for most new leases will now effectively be a thing of the past. When proceeding with new leases and lease extensions effective after 30 June, landlords  need to make sure not to charge their leaseholders any ground rent.

How Capsticks can help

Capsticks aims to be the firm of choice to registered providers, offering a full service across development and planning law, corporate and securitisation, housing leasehold and asset management.

If you have any queries around the ground rent reform, and how to mitigate the impact on your organisation, please speak to Spencer Vella Sultana or Ben Jeffery to find out more about how Capsticks can help.