Leasehold reform
The Queen’s Speech in May signalled the commencement of the Government’s proposed plans for leasehold reform – at least to a limited degree.
The Leasehold Reform (Ground Rent) Bill (“Bill”) was published on 13 May 2021. If the Bill becomes law it will mark a radical change for many leaseholders by moving away from the payment of ground rents. Whilst some ground rents are fairly low annual payments, there has been a demand for reform as a result of controversial doubling rent mechanisms which are included in some leases. The issue has increasingly attracted criticism in recent years with many developers seizing the opportunity to double the ground rents payable in leases every 5 or 10 years to increase their long term revenue stream. The concern is that these type of provisions can ultimately leave long leaseholders unable to sell or mortgage their properties. Many leaseholders were not aware of the potential financial consequences of such provisions when their leases were granted.
The Bill applies to leases of dwellings in England and Wales. This will predominantly be flats but could also mean houses. If the Bill is passed, a landlord may not require a tenant under a new long residential lease for a term exceeding 21 years (subject to a few exceptions) to make payment of a rent that is more than a peppercorn. In reality, this means that nothing more than an actual peppercorn can be demanded from a leaseholder which effectively reduces the ground rent payable to zero.
The proposal under the Bill is that landlords contravening the new law could face a fine. The Bill suggests a fine of up to £5,000 where the landlord asks the leaseholder for payment of a prohibited rent or, where having received such a payment, the landlord fails to refund it to the leaseholder within 28 days of receipt. There are also proposals for further fines to be imposed if the landlord continues to attempt to demand the prohibited rent. The Bill is likely to be amended before it becomes law so these penalties could be changed.
Unfortunately for leaseholders, the Bill will not have retrospective effect and existing leases will stay as they presently are. The Bill will therefore not assist the millions of existing leaseholders in England and Wales who will remain liable under their leases for ground rent. Those leaseholders essentially have two options. They can approach their landlords to see if they are willing to enter into a deed of variation to reduce the ground rent. However, it is very likely that landlords will decline this request. In that scenario, the leaseholder can seek a lease extension under statute. This can potentially reduce the ground rent to a peppercorn. However, the bad news is the leaseholder will have to pay a premium to the landlord and will also be liable for legal and other professional fees, so the exercise could prove costly.
The Bill has been widely welcomed and it is likely to receive broad cross party support. Some concerns have been expressed about issues the Bill does not address. In particular, the Government has previously made reference to plans to introduce a right for leaseholders of houses and flats to extend their leases up to a maximum term of 990 years with a peppercorn rent. It is envisaged that the premium payable in such a scenario to the landlord for agreeing to extend the lease would be based upon a new calculation that would be accessible online. Unfortunately, no details have been provided as to the basis of the calculation and, as yet, the online facility has not emerged.
It will be interesting to see how the Bill progresses and what that means for leasehold reform. We shall keep you updated on further developments!
Emma Cracknell is a solicitor in the Property department at Barker Gotelee Solicitors in Ipswich.
Ipswich Property Solicitors – for more information on our range of legal services, please call the team on 01473 611211 or email bg@barkergotelee.co.uk
