Background

The payment of ground rents by residential tenants of long leases has become something of a cause celebre, particularly where leases include ground rents that double every five, ten or twenty years making those leases less valuable and potentially unsaleable. Over a number of years, the government has indicated its intention of outlawing ground rents in residential leases. The draft Bill to implement these proposals has now been published in the House of Lords.

Extent

The provisions in the Bill apply to all long residential leases unless they are exempt. A long residential lease is one granted for a term of more than 21 years, whether or not a premium was paid. Leases that have their term fixed by law (for example perpetually renewable leases and leases terminable after a death, marriage or civil partnership) are also long leases. The provisions will apply to leases of retirement homes and flats but the provisions cannot be brought into force in respect of these leases before 1 April 2023.
The abolition of ground rents will not be retrospective. The provisions will apply only to those leases granted after the provisions are implemented. Grandfathering provisions will protect leases granted after implementation pursuant to an agreement for lease (but not an option or right of first refusal) exchanged before implementation.

The provisions will apply to leases of houses as well as flats, though the government has indicated that it intends to outlaw leases of houses.

Permitted rents

The only rent permitted under a lease within the new regime will be a peppercorn rent save in respect of shared ownership leases where a rent can be reserved in respect of the landlord’s remaining interest in the property. Overlap provisions will allow a new lease that replaces a pre-existing long lease to include a ground rent for the period that the pre-existing lease would have continued if the new lease had not been granted.

Leases that include rents that are prohibited will be deemed to include only the rents permitted under the new provisions.

A major issue with the Bill is that it appears to outlaw all rents, not just ground rents. As currently drafted, it would prevent landlords from charging service charge, insurance premiums, consent charges or other payments if they are reserved as rent. This needs to be addressed as the Bill proceeds through parliament.

Exemptions

There are a limited number of leases that will be exempt and under which ground rents can be charged. These are:

• Business leases where residential property can be used without consent for business purposes and the use of the property as a dwelling significantly contributes to the business purposes. The landlord and the tenant must have given notice to each other before the grant of the lease that the property will be used for business purposes;
• Existing leases of houses and flats that are extended under the statutory procedures entitling tenants to claim an extension of their leases;
• Community housing leases – those granted by a community land trust or in buildings controlled or managed by co-operative societies; and
• Home finance plan leases – those granted pursuant to an arrangement that is a regulated home reversion plan under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 or granted by a finance provider to a home buyer pursuant to a rent to buy arrangement.
  
  

Enforcement

The provisions will be enforced by local weights and measures authorities. They will have the power to impose financial penalties between £500 and £5,000 on landlords who charge illegal rents and order the repayment of the rents illegally charged. In addition, tenants will have the right to apply to the First Tier Tribunal for a recovery order if they have been charged illegal rents.

Where a lease reserves a prohibited rent, either the landlord or the tenant will be able to apply to the First Tier Tribunal for a declaration as to the deemed rent that should be substituted for the prohibited rent.

Comment

The provisions of the Bill are not unexpected although the apparent prohibition of all rents, not just ground rents, needs to be addressed. The Bill is the first of many promised reforms to the residential market to give greater protection and certainty to residential tenants of long leases that will substantially alter the balance of power between landlords and tenants.

Developers of residential property that will be sold on a long leasehold basis will need to factor the abolition of ground rents into their financial appraisals as a previously valuable and saleable income stream from completed developments will be lost.