Leasehold Reform and Ground Rents – Two Tier Leaseholds?

The Leasehold Reform (Ground Rent) Act 2022 received Royal Assent on 8 February 2022.  When it comes into force, it will abolish substantive ground rents for most residential long-leases in the UK.

However, the Act will only apply to future leases and therefore will have no real impact on existing leaseholders, many of whom have faced spiralling ground rents.

Leasehold Agreements

Traditionally, flats were sold as leases, but houses were sold as freeholds.  More recently, however, developers have been seeking to increase their profits by selling houses on long leases too. This enabled them to receive the purchase price of the house, but also then to collect annual ground rent or, more commonly, to sell the freehold reversion (and the right to receive the ground rents) to ground rent investors for a further lump sum. 

Sometimes, purchasers were told that their long-lease was the “equivalent of freehold”. Sometimes they were told that they would be able to purchase their freehold later, only subsequently to find that it had been sold to another company. Often the leases provided that ground rents would double every few years. Once it was realised that the ground rent payments might quickly outrun inflation and become unaffordable, the value of the houses concerned was massively diminished and many purchasers became trapped in their homes, unable to sell them. At the same time, the freehold reversion (carrying with it the right to receive the ground rents) became too expensive for the purchasers to buy.

In March 2019, the Housing, Communities and Local Government Committee published its report on ‘Leasehold Reform’. One of its recommendations was that the Competition and Markets Authority (‘CMA’) should investigate mis-selling in the leasehold sector. In July 2019, the CMA launched an investigation into potentially unfair contract terms in leases, as well as broader allegations of mis-selling of leasehold property. Many large developers voluntarily stopped selling houses on long-leases. Nevertheless, the Government, with the CMA’s strong support, indicated that it would introduce legislation to improve outcomes for leaseholders and, in particular, to abolish ground rents in future leases.

The Leasehold Reform Act 2022

The Leasehold Reform (Ground Rent) Act 2022 is that legislation.  When brought into force, the new law will restrict ground rents on the majority of future long residential leases in England and Wales to “one peppercorn”, which means nil or zero.  It will apply not just to houses but also to flats.  It will also prohibit the charging of administration charges for or in connection with the payment of a peppercorn rent.  The Act should therefore prevent homes being let on terms that include onerous ground rents in the future. 

Two Tier Leaseholds

The fundamental problem is that the new law will not reduce to zero the ground rents payable under existing leases and so it will not rescue those who are already caught in the onerous leasehold trap.  Further, it will permit landlords to grant new leases of existing homes to the existing tenant(s) of those homes at substantive ground rents, provided that those substantive ground rents do not exceed the ground rent payable under the existing lease. The Government has promised a second Act of Parliament to address the issues with existing ground rents but there is, as yet, no indication as to when that might happen. 

By heading off the problem in new leases but not resolving the problem in existing leases, the legislation will probably create a two-tier leasehold market.  New leases, subject to the new legislation, will have no ground rent obligations and will inevitably be more attractive than existing leases which do have ground rent obligations, even if those ground rent obligations are not punitive. That distinction will inevitably feed into prices, but there might be other unforeseen and unintended consequences of the legislation. 

The Leasehold Reform (Ground Rent) Act 2022 is not yet in force. It is expected to come into force this summer, but it will do nothing for existing leaseholders with punitive ground rent provisions and it is likely to create a two-tier leasehold market.

More information

For further information please contact our Property Litigation team.

The above is meant to be only advice and is correct as of the time of posting. This article was written by Stephen Eccles, Partner in the Property Litigation team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of April 2022