June 16, 2022

The Leasehold Reform (Ground Rent) Act 2022 – legislation with unintended consequences?

Posted in Property Disputes

With only a matter of weeks to go before the Leasehold Reform (Ground Rent) Act 2022 (“the Act”) comes into force, here is a quick reminder of what the legislation is all about and how it might affect parties which operate in the residential sector in intended and (arguably) unintended ways.

The Act received Royal Assent on 8 February 2022. The legislation follows Law Commission consultations in 2017 and 2018 and its subsequent report, published on 21 July 2020 and years of previous consultations, media coverage and political consideration on what might be done to address perceived unfairness in the leasehold property ownership system in England and Wales.

The Act is part of a two-part legislative process introduced in January 2021 by the then Secretary of State, Robert Jenrick and will come into force on 30 June 2022. The second phase of that legislation will look at issues connected with the way in which the premium will be calculated for lease extensions. The Act fulfils the government’s commitment to “set future ground rents to zero”.

Which leases are affected?

The Act will apply to new residential long leases (called ‘regulated leases’) that are entered into after the Act has come into force. ‘Long leases’ are defined in the Act as leases for a term of more than 21 years. The definition does not therefore cover shorter term tenancies.

Certain leases are excluded – for example, business leases, statutory lease extensions community housing leases and home finance leases.

The Act applies to retirement properties, although the provisions do not come into force in respect of these properties until 1 April 2023. The Act also applies to shared ownership leases, although a landlord can continue to charge rent on its share of the property.

If a voluntary lease extension is granted, the Act will only apply once the original term of the lease has expired, even where there is a deemed surrender and regrant due to a change in the demise of the lease.

Implication for landlords:

Whilst broadly speaking, the Act only applies to leases entered into after 30 June 2022, there are circumstances where changes to existing lease arrangements might have unintended consequences of bring those arrangements within the purview of the Act.

For example, the Act is considered to apply to existing leases which are surrendered and re-granted. Landlords will therefore need to exercise caution in considering any amendments to existing leases which might be construed as a surrender and regrant. For example, adding additional land to an existing lease would be construed as a surrender and regrant and would arguably be caught by the Act.

Landlords may also be more reluctant to consider granting informal / voluntary lease extensions, given that those extensions are not excluded from the protection afforded by the Act (albeit the Act will only apply after the original term has expired).

Fines of between £500 to £30,000 can be imposed on landlords who breach the Act’s provisions and charge ground rent in contravention of the Act. The fine would be applied in respect of each qualifying lease so if, for example, a number of flat leases were granted with a ground rent on a new development, the total fine levied could be considerable.

Implications for flat owners:

For flat owners entering into a regulated lease after 30 June 2022, it will mean that they have to pay no ground rent. Flat owners will also need to give consideration to any lease amendments they seek from their landlords and whether they effect of those amendments result in their lease becoming a regulated lease under the Act.

Implications for developers:

Leases entered into after the Act has come into force but which are granted pursuant to an option or right of first refusal pre-dating the Act will still be subject to its provisions. Developers will therefore need to review any contracts entered into to grant leases to check whether the Act might apply.

The future?

Whilst the Act operates to restrict the charging of ground rent in residential long leases (something which the government has been concerned about for some time), it remains to be seen whether the legislation will be successful in simplifying leasehold ownership, reducing costs for flat owners and addressing the perceived unfairness in the leasehold property ownership system in England and Wales.

Landlords will need to exercise caution when they consider any lease variations or even the introduction of a new lease plan. They may also be more reluctant to engage in lease extensions outside of the statutory framework set out in the Leasehold Reform Housing and Urban Development Act 1993. The results for flat owners may be an increase in the costs they are required to pay for lease variations and informal lease extensions – this is surely not something the government intended or wanted.

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