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After beginning life in the House of Lords, the Leasehold Reform (Ground Rent) Bill 2021 is being scrutinised by MPs this week. It’s the first part of what the government have described as “the most significant changes to property law in a generation”. If it becomes law, which it inevitably will, the new legislation will limit ground rents on new long leases of houses and flats (granted for a term of more than 21 years) to a peppercorn – effectively zero.
To avoid landlords trying to circumvent the new provisions, there will be a prohibition on administration charges relating to the peppercorn rent. The legislation also incorporates anti-avoidance provisions, with a potential fine of up to £30,000 for landlords breaching the rules.
Ground rent scandal
The new legislation aims to address the scandal of escalating ground rents, which has created serious problems for many leaseholders in recent years, making their properties unsaleable.
It’s been calculated that if rent doubles every 25 years, the increases are broadly in line with the Retail Prices Index. However, many developers have become greedy, shortening the doubling period – in some cases to only 10 years. The effect of this is dramatic. Let’s take, for example, a lease term of 150 years, with an initial ground rent of £150 per annum. If the rent doubles every 25 years, by the end of the term, the rent will be £4,800. By contrast, doubling the rent every 10 years will see it skyrocket above £2 million before the end of the lease.
But there will be exceptions to the new law. These include:
- business leases;
- statutory lease extensions of houses and flats;
- community housing leases; and
- home finance plan leases.
Purchasers should be aware that the legislation will catch retirement properties, but not until 1st April 2023. And while voluntary lease extensions will be caught by the new rules, the ground rent restriction will only apply from the expiry date of the original lease term. Also, although the new law will apply to shared ownership leases, the landlord can continue to charge rent on their share of the property.