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Ground Rent and The Leasehold Reform (Ground Rent) Act 2022
There has been a lot of coverage in the media surrounding ground rent, and the homeowners who feel that the levels affecting them are unfair and too high.
Parliament eventually addressed this and Kerry Cudworth, Solicitor in our Residential Conveyancing team, talks us through everything we need to know.
What is Ground Rent in the UK?
Ground rent is a contractual fee charged on leasehold properties. The leaseholder (owner of the leasehold interest, also referred to as the tenant) pays this fee to the freeholder (who is also known as the landlord). The ground rent is set out in the lease and can be a fixed amount for the whole of the lease, or it can increase at certain intervals.
Why is Ground Rent an issue?
Most people think of an assured shorthold tenancy (AST) as a short-term let, for example 6 or 12 months. It’s therefore sometimes surprises people that a long lease can also be classed as an AST or an assured tenancy. For example, a lease of 125 years can be considered an AST, and this means that the provisions of the Housing Act 1988 will apply.
Why does it matter if a lease is also an AST?
Essentially, it can alter the protection that is on offer to a tenant and their mortgage company. The level of ground rent is the triggering factor.
Traditionally, long leases were granted for a peppercorn rent, which means that no monetary rent is payable and the lease could never qualify as an AST or assured tenancy. Today, many landlords charge a monetary figure for ground rent.
If you are buying, or already own, a leasehold property with a ground rent over £250 (or over £1,000 in London), then the lease falls within the Housing Act 1988 and will be classed as an AST.
Leases may start with a lower ground rent but you may have seen in the press, that long leases in particular can contain escalator clauses (allowing the ground rent to double every 10 or 20 years - or less). This means that the resulting increases in the ground rent can be quite significant, taking the lease into the realms of an AST. This should be a factor in considering the financial implications of purchasing a leasehold property, and certainly has to be considered for any mortgage lender that may be involved.
Does a high ground rent prevent mortgage borrowing on a property?
Possibly, as some lenders won’t accept properties that either have a ground rent which is already at AST level or which will become an AST at some point during the Lease. Many lenders will not lend on a lease which has an escalator clause which, say, doubles the ground rent every 10 years. These matters will need to be reported by a conveyancing solicitor to any mortgage lender for their approval, and the mortgage offer may be withdrawn as a result.
The issue is that the landlord can forfeit (terminate) the lease if there is a breach of the promises that are set out in the lease, and this generally includes the non-payment of ground rent. Most leases give the landlord a right to end the lease if ground rent goes unpaid for 21 days but the courts have the power to grant relief. When relief is granted, the court will not allow the lease to be forfeited so long as the arrears are paid off.
In the cases of leases which are ASTs, the Housing Act 1988 applies. If the rent is three months or more overdue, the courts have no choice but to approve a landlords application to bring the lease to an end. The property is then handed back to the landlord regardless of any mortgage lender having a charge over the property. The mortgage lender loses their security for the mortgage money owed by the leaseholder, and the leaseholder loses their home. You can see why it is a significant concern to lenders and leaseholders alike.
What is The Leasehold Reform (Ground Rent) Act 2022?
This Act of Parliament came into force on 30th June 2022 for most leasehold properties (retirement properties didn't benefit until April 2023 and there are a few other exceptions). It has been dubbed one of the “most significant changes to property law in a generation”.
The Act is designed to put an end to ground rents on new leases which are granted after 30th June 2022, and instead ground rents will fall back to the old fashioned position and be ‘one peppercorn’.
The Act will also prevent landlords charging an administrative fee for collecting the peppercorn rent and fines up to £30,000 may be applied to any landlord found to be in contravention of the Act.
What does this mean for leaseholders?
New leases over 21 years in length granted after 30th June 2022 will not have a monetary ground rent, and the lease will therefore never fall into the category of an AST. This means that leases will be more desirable to mortgage lenders and leaseholders (who will no longer have the added financial commitment of paying ground rent on top of their mortgage).
What about leases granted before 30th June 2022?
The Act is not retrospective so any lease entered into before 30 June 2022 will not benefit from the new rules and may still have ground rent provisions. This means if you are buying a flat after 30th June but the Lease was in existence before this date, you will still need to adhere to any ground rent provisions to ensure that there is no breach of the lease. Please ensure you speak to your solicitor so that they can explain the current ground rent and any potential increases under the lease that you are purchasing.
If you do want to vary the lease so that ground rent becomes ‘one peppercorn’, you would need to do so by agreeing a Deed of Variation to amend the lease. This can be done during a purchase if agreed by the landlord, or by a statutory lease extension if you have owned your leasehold property for at least two years.
If you would like to discuss any of the information in this article, please contact Kerry Cudworth at our York office on 01904 624185.
