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Leasehold Reform (Ground Rent) Bill

Commercial Property

What is the Leasehold Reform (Ground Rent) Bill?

The Leasehold Reform (Ground Rent) Bill has been presented to Parliament as the first step in meeting the government’s objective to overhaul the law governing  leasehold properties. The Bill aims to cap the amount of annual ground rent a landlord can charge on a long, residential leasehold property to a peppercorn (which essentially bars them from charging a monetary amount as ground rent) and will seek to impose hefty financial penalties should landlords attempt to charge tenants a higher amount.

As currently drafted, the Bill will apply to the grant of all future long leases (which are referred to in the Bill as ‘regulated leases’) other than a few exceptions such as business leases or shared ownership leases, or the ‘excepted leases’ for the purposes of the Bill. It is not presently anticipated that the new law will be applied retrospectively to existing leases.

Will the Bill apply to my lease?

The Bill will apply to all long residential leases granted on or after the relevant commencement date other than if they are an excepted lease. To be classed as a long lease, the Bill cites that the lease must be for a term of 21 years or more, a lease granted with the perpetual ability to renew or a lease granted for a lifetime interest.

There is a short list of leases expected to be excepted from the Bill, currently comprising of business leases, statutory lease extensions, community housing leases and home finance plan leases.

How does this affect me as a landlord?

Until the Bill is granted Royal Assent the law will remain as it is now in regard to how much ground rent can be demanded on the grant of a long lease. However, landlords should be aware that buyers are likely to find it harder to obtain a mortgage as many lenders will move away from granting financing on such properties and buyers are also likely to be advised to seek to have the demand for ground rent removed before proceeding to purchase.

Landlords will also need to be mindful that, once the Bill becomes law, any material variation of a lease which is deemed to amount to a surrender and grant of a new lease will be subject to the new rules.

If a landlord continues to collect a higher rent on a regulated lease, they could be subject to a financial penalty of between £500 and £5000 for each existing lease in breach and tenants will also be given the option to claim back any non-refunded rent.

As drafted, the Bill also allows tenants to file such a claim against both previous and existing landlords. Therefore, when taking over the freehold of a building after the Bill becomes law, the incoming landlord should ensure that the leases in existence do not breach the legislation as they may find themselves held to be financially liable. Similarly, the exiting landlord should be aware that they will remain financially liable for a period of up to six years after the sale.

How does this affect me as a tenant?

If you are a tenant of a leasehold property prior to the Bill being passed, then your landlord will be permitted to continue to charge you ground rent in accordance with the terms of your lease up until any such variation is made that is tantamount to a surrender of the current lease and grant of a new one. It is currently anticipated that lease extensions obtained via the statutory process will be excepted from the new laws and therefore it is likely to be quite some time before existing tenants will benefit from the changes unless further amendments are made to the Bill at the Committee Stage.

For individuals entering a lease after the introduction of the new legislation, no ground rent can legally be collected. The only monies a landlord will be permitted to collect are those which are in direct payment for a service which the landlord is obliged to provide under the terms of the lease in place. Such payments are usually collected as a service charge separately from the ground rent.

For those looking to buy a leasehold property whilst the Bill is still moving through Parliament, you may well find that you have more bargaining power to request that any clause contained within the proposed lease demanding a ground rent that is higher than a peppercorn is amended. Prospective buyers may also find it harder to obtain a mortgage as lenders are likely to change their terms to reflect the anticipated law.

For more information, please contact Emily Ellerby-Calladine on 01733 295 685 or email Emily.Ellerby-Calladine@hegarty.co.uk

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