When the Leasehold Reform (Ground Rent) Act 2022 [“LRGRA 2022”] comes fully into force, it will limit the ground rent chargeable on most new long residential leases to one peppercorn per year.
It will also prohibit payment of administration charges in relation to peppercorn rents. The LRGRA 2022 can be seen as part of a wider government programme to make leaseholds unattractive for new residential properties and eventually even potentially to pave the way for the use of commonhold for new properties.
Ground rent restrictions: overview
The LRGRA 2022 limits the ground rent chargeable on most new long residential leases to one peppercorn per year, effectively restricting ground rents to zero financial value.
The landlord under a regulated lease, or anyone acting on their behalf, must not ask the tenant for payment of prohibited rent or fail to refund such payment within 28 days of receipt. This prohibition continues to apply to a landlord after it has assigned the reversion, and benefits the current tenant under the lease, a previous tenant, anyone acting on their behalf and any guarantor.
Prohibited rent means any rent exceeding the amount permitted under the LRGRA 2022. Except where a special rule applies, the permitted rent is an annual rent of one peppercorn.
Rent includes anything “in the nature of a rent, whatever it is called”. A sum payable in respect of rates, council tax, services, repairs, maintenance, insurance or other ancillary matters does not constitute rent for these purposes, merely because it is reserved as rent under the lease.
When will the LRGRA 2022 come into force?
The LRGRA 2022 will be brought into force at different stages. The main substantive provisions (including the ground rent restrictions) will come into force on 30 June 2022. The only exemption from commencement at this stage will be retirement home leases: these provisions will not come into force before 1 April 2023.
The leases regulated by the LRGRA 2022
Subject to exceptions, the ground rent restrictions apply to long leases of single dwellings granted for a premium on or after commencement of the relevant provisions, referred to in the LRGRA 2022 as regulated leases.
A lease includes a lease at law or in equity and includes a sub-lease. A long lease means any of the following:
- A lease granted for a term certain exceeding 21 years, whether or not it is (or may become) terminable before the end of that term by notice given by or to the tenant or by re-entry or forfeiture or otherwise.
- A lease for a term fixed by law under a grant with a covenant or obligation for perpetual renewal, other than a lease by sub-demise from one which is not a long lease.
- A lease taking effect under section 149(6) of the Law of Property Act 1925 (leases terminable after a death, marriage or civil partnership).
A regulated lease is defined as a lease that meets all of the following conditions:
- It is a long lease of a single dwelling. A dwelling means a building or part of a building occupied or intended to be occupied as a separate dwelling, together with any yard, garden, outhouses and appurtenances belonging to it or usually enjoyed with it.
- It is granted for a premium. Premium means any pecuniary consideration for the grant of a lease, other than rent. Note, however, there is an exception where there is a deemed surrender and regrant by virtue of a variation, as referred to below.
- A small number of long residential leases are let where no premium is paid for the granting of the lease and, instead, a market rent is paid by the tenant. The LRGRA 2022 is not intended to apply to long leases such as these. However, special rules have been introduced to cover a deemed surrender and regrant following a variation, where no premium is payable, which appears to create a possible arbitrary distinction between the two.
- It is granted on or after the relevant commencement day, unless pursuant to a prior contract. Exceptions apply for leases granted pursuant to options and rights of pre-emption, however. Where a lease is granted pursuant to a contract exchanged before the relevant commencement day, the landlord will want to ensure that a copy of the contract is retained with the lease as evidence that the lease complied with the LRGRA 2022 and/or that the lease contains a declaration stating that it is so granted.
- It is not an excepted lease. Excepted leases include business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases.
The restrictions introduced by the LRGRA 2022 do not generally apply to the following:
- Leases granted before its substantive provisions come into force. That is, the provisions do not apply retrospectively.
- Leases granted pursuant to contracts exchanged before commencement. There is an exception, however, for leases granted pursuant to a pre-commencement option or right of first refusal. These will be regulated leases, if they satisfy the remaining conditions.
Where special rules apply
Special rules apply to leases that replace leases granted before the relevant commencement day, leases arising by deemed surrender and regrant where there is a variation, and shared ownership leases.
A replacement lease is defined as a lease which demises premises consisting of, or including, some or all of the premises demised by a pre-commencement lease. A pre-commencement lease means a long lease of a dwelling that is granted before the relevant commencement day.
The following provisions apply on the grant of a replacement lease which is a regulated lease, where the term of the replacement lease starts before the end of the original lease:
- Ground rent can only be charged for the unexpired term of the original lease (which is defined as the excepted period). This ground rent must be “a rent not exceeding the rent that would have been payable under the pre-commencement lease in respect of that period.” For the period of the extension (if any) until the last day of the term of the replacement lease, the ground rent can only be a peppercorn. That is, Section 6 of the Act permits a new lease that is granted by way of renewal or extension on a voluntary basis to keep a ground rent but then only during the old lease term and at the old rent.
The rationale appears to be that landlords should not feel disadvantaged if they agree to voluntary lease extensions.
The parties may agree a reduced ground rent during the excepted period, however.
Deemed surrender and regrant by variation
A deemed surrender and regrant can arise where the demise or term of the lease is varied. Under the LRGRA 2022, where a regulated lease, or a lease granted before the relevant commencement date, is varied so as to result in a deemed surrender and regrant, the new lease will be a regulated lease even if it is not granted for a premium. The government, it appears, did not want landlords to circumvent the ground rent restrictions by simply varying the demise or term where no premium was payable.
Shared ownership leases
Special rules apply to regulated leases that are shared ownership leases, where the tenant’s share in the property is less than 100%.
A landlord can charge rent in respect of their share of a shared ownership property, but only a peppercorn rent is permitted to be charged with respect to the tenant’s share of the property.
Where the lease does not distinguish between rent on the landlord and tenant’s respective shares, any rent payable under the lease is to be treated as payable in respect of the landlord’s share.
Where the shared ownership lease being granted is a replacement lease within the provisions of section 6 of the LRGRA 2022, the permitted rent in respect of the tenant’s share only drops to a peppercorn for any period of extension of the term. The original rent provisions can be maintained for the remainder of the original term. There is no restriction on the permitted rent for the landlord’s share.
The LRGRA 2022 also prohibits payment of administration charges in relation to peppercorn rents. As an anti-avoidance measure, Schedule 11 to the Commonhold and Leasehold Reform Act 2002 is amended to ensure that no administration charge is payable in relation to the collection of any ground rent that is restricted to a peppercorn by the LRGRA 2022. The tenant is permitted to apply to the relevant tribunal for a determination whether an administration charge is payable or an order varying the lease on the ground that such an administration charge is not payable. Section 24 of the Landlord and Tenant Act 1987 is also amended to allow a tenant to apply for an order appointing a manager where prohibited administration charges have been made.
The Act gives enforcement authorities power to impose fines (ranging from £500 to £30,000) on landlords who demand ground rent in contravention of the LRGRA 2022. The Local Authority Weights and Measures department has responsibility for enforcement.
In addition, if a ground rent is collected when it shouldn’t be once the LRGRA 2022 is in force, then the rent must be repaid to the leaseholder with interest.