The Queen’s Speech signalled that leasehold reform – to a very limited degree – is on the Government’s legislative agenda for the forthcoming parliamentary session.
The Leasehold Reform (Ground Rent) Bill will “prevent the practice of onerous and escalating ground rents from affecting future leaseholders”. It will also ensure that “for the first time ground rents in new residential long leases will have no financial demand”, and that “leases will be set in law at a genuine peppercorn level”. In short, if and when the Bill becomes law, it will ensure that leaseholders of new, long residential leases cannot be charged a financial ground rent for no tangible service.
For freeholders contravening the new law, the Bill proposes fines of up to £5,000.
Doubling ground rent
The issue has increasingly attracted criticism in recent years, with many developers seeing ground rent as an easy and lucrative long-term revenue stream. There have been some well-publicised cases where ground rent is set to double every 5 or 10 years. Doubling ground rent provisions or ground rent increases in line with the RPI are likely to make a leasehold property unmortgageable.
Peppercorn ground rent
There is often confusion over the term ‘peppercorn rent’. The term is a legal one and means that nothing more than an actual peppercorn can be sought from a leaseholder, effectively reducing the ground rent to zero.
The first reading of the Bill took place on 12 May 2021, commencing its journey through the House of Lords. While it can expect broad, cross-party support, there is some concern that no dates have yet been scheduled for future readings to finalise the legislation.
Also, while the Bill has been widely welcomed, it represents only the tip of the iceberg in terms of proposed leasehold reform. In respect of ground rent alone, the Bill applies only to new-builds, meaning that 4.5million existing leaseholders in England and Wales will remain liable.
Existing leaseholders facing an onerous ground rent currently have two options. They can approach their freeholder to see if they are willing to enter into a deed of variation. If the freeholder declines – which is likely – the leaseholder can seek a statutory lease extension, which will reduce the ground rent to a peppercorn. However, that must be balanced against the requirement to pay a premium to the freeholder, as well as the related legal and other professional fees.