During my residential and commercial property seat at Allan Janes, I was unsurprised to see how quickly the law surrounding residential property and housing changes and adapts to current times compared to the pace of commercial property legislation (although the transactional pace of commercial deals is quicker). Perhaps this is naïve to say, but I think this is caused by constant political pressures the government of the day faces from the wider population (alternatively…voters!). ‘Pledges’ and promises from political candidates and tragic events (such as Grenfell) mean the housing legislation has to accommodate the current political environment.

Putting my politics degree undertones to the side, this blog focuses on the (semi) recent legislation of the Leasehold Reform (Ground Rent) Act 2022 (the “Act”).

What is ground rent?

Ground rent put simply is ‘rent’. It is a usual characteristic of older leases whereby the leaseholder will pay a premium when the lease is first granted and the landlord will collect yearly ground rent. This rent is usually a proportionately small sum compared to the value of the lease and the premium paid (usually up to £250 yearly), however over the term of the lease this can add up to be significant and leases will often include the right for this annual ground rent to increase at specific points in the lifetime of the lease.

What has changed in the law?

The Act essentially abolishes ground rent, but only for new leases and in certain circumstances where a lease’s length is extended. Landlords are now no longer allowed to charge ground rent where there is a new lease of a ‘single dwelling’ and a premium has been paid. This means if you pay a lump sum for a lease, you cannot be charged ground rent additionally and the ground rent will be a peppercorn (yes, a literal peppercorn).

Sounds straight forward so far. It gets slightly more complicated where there is an existing lease that is being extended – it is quite common for existing leases to be extended, as if the remaining term goes below 90 years, the value of the lease significantly decreases and the cost to extension becomes significantly higher.

With a lease extension, any existing ground rent reserved by the original lease can still be charged, however no additional ground rent can be charged. This includes increasing the ground rent currently payable, as well as extending the term the original ground rent is payable for.

An example…

Let’s say there is a lease with a term of 99 years from the year 2000, a premium of £100,000 was paid and there is ground rent chargeable at a rate of £33 for the first 33 years, £66 for the next 33 years, and £99 for the remaining 33 years.

At the current year of 2024, the lease has 75 years left to run…time to renew. The proposed renewal will be by way of agreement with the Landlord (rather than what is known as a Statutory Lease Extension, which has different rules again), is to increase the original term of the lease to 125 years meaning it will expire in 2125.

As you can see, the original ground rent expires in 2099…this ground rent is permitted. If the lease extension was to claim a further ground rent to the end of 2125 or increase the current ground rent, this would be classified as prohibited rent’ and the landlord is subject to a fine of between £500 and £30,000 by the local authority.

You may think aha! A lease extension by a deed of variation is effectively a surrender and regrant of the lease, and if no premium is charged for the re-grant/lease extension, then there is no premium payable and ground rent can be charged! Unfortunately for the landlord this loop hole was anticipated by legislators and has been plugged – see s.1(5) of the Act.

Summary

So, in summary – ground rent has been abolished going forward but is not retrospective to leases which have already been granted.

This is a very brief and simple summary of the Act, but if you would like more information or if you are a tenant and feel you have been required to pay prohibited ground rent, you may wish to get in touch with our litigation team on 01494 521301.