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The Leasehold Reform (Ground Rent) Act 2022 comes into force in England and Wales on 30 June 2022. This will rid future homeowners of annual costs known as ground rent. Sometimes costing hundreds, or even thousands, of pounds a year, these charges deliver no clear service and, particularly in more modern developments, can be set to escalate regularly and rapidly, representing a significant financial burden for leaseholders.

However from 30 June, as the cost-of-living crisis continues to escalate, anyone buying a home on a new, long lease will not be charged ground rent. For retirement properties, the law will come into effect no earlier than 1 April 2023.

Background to the Ground Rent Act

The government has been building up to the Ground Rent Act for some time. In 2017, it released the housing white paper, ‘Fixing our broken housing market’. This was followed by the release of a document, ‘Tackling unfair practices in the leasehold market’, which looked at a range of measures to tackle unfair and unreasonable abuses of leasehold, in particular the use of onerous ground rents.

Then, on 7 January 2021, the government announced that in the future they would make it easier and cheaper for leaseholders to extend their leasehold. This included empowering leaseholders to extend their leases to 990 years at zero ground rent; making changes to the valuation criteria to make it fairer, cheaper and more transparent to extend a lease using an online calculator; and removing marriage value from the calculation.

So, the Ground Rent Act coming into force is the first legal step taken by the government in its drive to make home ownership fairer and more secure.

What the Act means in practice

In practice, the new law will mean that, from 30 June, the ground rent on most new leases in England and Wales cannot be anything more than one peppercorn per year – i.e. no money can be legally charged or paid. Those found to be charging more than a peppercorn will face a fine of between £500 and £30,000.

Landlords will no longer be able to set ground rents – other than a peppercorn – on new, qualifying residential long-leasehold properties (long-leasehold properties are classed as flats and houses with lease terms exceeding 21 years).

For new builds, ground rents on new leases will be abolished, meaning developers can no longer set onerous or escalating ground rent review patterns. This also applies to new shared-ownership leases, though a rent can still be set in respect of the landlord’s share.

Interestingly, the Ground Rent Act will also apply to properties on the Crown Estate; until now, the Crown Estate was not obliged to set peppercorn ground rents in a statutory lease extension claim.

Importantly (and perhaps indicative of questionable practices uncovered by the government’s investigations into ground rent charges), the Act will also ban freeholders from charging administration fees for collecting a peppercorn rent.

Are there any exemptions?

Yes, there are a few exemptions from the Ground Rent Act: business leases, certain financial products, and applicable community-led housing. Statutory lease extensions for houses and flats will also be exempt because ground rents in these cases are already set to a peppercorn when the lease is extended.

It is also important to note that the Act cannot be applied retrospectively to any existing leases – only if action is taken to extend or vary a lease can ground rent be reduced to a peppercorn.

Moreover, whilst the Act will apply to voluntary lease extensions, only the extended portion of the lease will be reduced to a peppercorn. Indeed, landlords are allowed to charge a ground rent not exceeding the rent that would have been payable under the previous lease, up until the expiry of the original term.

What to do now

In preparation for the 30 June enforcement date, many freeholders have already reduced ground rent on new leases to nil.

However, we advise anyone preparing to sign a new lease on a home to speak to their solicitor to ensure their ground rent charges reflect the upcoming changes.

Notes to editor

Emily Norman, Senior Associate, Residential Valuation

Emily provides valuation advice to landlords and tenants including lease extension advice. She also values individual houses and flats, residential portfolios and development sites for a variety of purposes.

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