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by Richard Greenby, Partner at LEWIS NEDAS LAW and Head of our Whetstone office at Prospect House, 2 Athenaeum Rd, London N20 9AE.

An article looking at how ground rents have grown over the years, the problem this has presented to leaseholders and mortgagees and as to how a bill before Parliament proposes to deal with this issue in a fundamental way. 

Background and the Need for Change

Annual ground rents in residential long leases (granted for a period of more than 21 years) used to be limited to a peppercorn (having no monetary value) or a nominal amount.

The Landlord was happy to accept the premium being paid on the grant of the lease without looking for any substantial payment after the lease was granted.

This approach has changed in recent years and some Landlords on newly granted long leases of residential property are not satisfied with just taking a premium on the grant of a lease but are also including a fairly high annual initial ground rent in the lease and arranging for it to be reviewed on a frequent basis. In some reported cases the ground rent doubles every ten years.

The effect of these increasing ground rents is that long leaseholders may find themselves having to pay much higher amounts than they originally anticipated and this may become unsustainable.

It also means that the higher ground rents can have a serious impact on market value making it more difficult for leaseholders to sell and mortgage their properties.

The Housing Communities and Local Government Select Committee when carrying out an enquiry into leasehold Reform in 2018-19 noted that “ … it is increasingly clear that ground rent in excess of 0.1% of the value of the property or £250 - including rents likely to reach this level due to doubling, or ground rent review mechanisms – is beginning to affect the saleability and mortageability of leasehold properties”.

The higher ground rents also make it more costly for leaseholders when applying for an extension of their leases or on enfranchisement as it forms part of the calculation to determine the amount payable.

As part of the consultation process, it was found that developers were able to sell ground rents for 35 times the annual ground rent value which is more than they would be able to charge a purchaser of a new build house for the freehold of the property.

A number of developers had been involved in such ground rent schemes and the Competition and Markets Authority were concerned from the evidence they had received that leaseholders had been misled. There was reluctance by some of the well-known developers to change their approach or to alter the provisions in leases they had granted.

Faced with this intransigence and with a desire in an age of consumerism to make the process more transparent and fair, reform was considered essential.   

Consultation and Reform

Following a consultation process regarding leasehold reform which was published in December 2017 the then Secretary of State for Housing, Communities and Local Government Savid Javid said:

”Looking at the responses to this consultation it’s clear to me that real action is needed to end such abuses and create a system that works in the best interests of consumers. And that’s exactly what the government will deliver.”

Limiting the right of Landlords to charge a ground rent of a peppercorn on the grant of new lease for residential properties is the first stage in a comprehensive reform of the leasehold system and is described by the Government as ’part of the most significant changes to property law in a generation’    

The Bill

As soon as the Leasehold Reform (Ground Rent) Bill has completed its final stages in Parliament and been implemented,  it will only be permitted to grant a long lease for a new qualifying residential flat or house at a zero ground rent of a ‘peppercorn’.   

The Bill also prevents the Landlord from charging for the administration of the ground rent as an anti-avoidance provision to stop the Landlord from charging the ground rent by another name.

Failure to comply will be a civil offence for which a financial penalty can be imposed from £500 to £30,000.

This change in the law will only apply to new leases and will not help existing leaseholders who may be facing spiralling increases in ground rent.

This is perhaps the most disappointing aspect of the Bill because having found this widespread ‘abuse’ as the Secretary of State called it, it was not considered appropriate to remove offending ground rent provisions in existing leases because the financial impact of doing so had not been determined.

Existing ground rents will continue to be payable but there are proposals to make it easier for leaseholders to buy their freehold and to buy themselves out of their ground rent obligation. Unfortunately, there is no firm timetable for this to take place.    

The Bill does not apply to business leases but this exemption will not apply to mixed-use developments which include both business and residential premises and clarification on this issue is expected.

In respect of a voluntary informal non-statutory lease extension, where a leaseholder is granted a lease that replaces a lease granted before the Act comes into force the ground rent can only be charged for the unexpired term of the original lease. As soon as that period has ended the ground rent must return to a peppercorn. 

It will exclude community housing leases and home finance plan leases.  

Retirement properties will be exempt until 1st April 2023.

This article is only to provide you with a general statement of the proposed changes in the law and is not to be relied upon as legal advice.

Please contact Richard Greenby, Partner and Head of our Whetstone office for enquiries re Conveyancing and Property law issues.

Landline: 020 7 691 4560

Email: This email address is being protected from spambots. You need JavaScript enabled to view it. 

Address: Lewis Nedas Law, Prospect House, 2 Athenaeum Rd, London N20 9AE.

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