Ground rent and service charge for later living developments
The majority of later living developments contain a wide range of communal facilities and services for residents to utilise to enhance the appeal of these types of developments to potential purchasers. Communal areas (commonly lounges and gardens) will generally be managed by the developer or a management company and the residents may also have access to on-site facilities such as a fitness centre, laundry services, cinema or swimming pool. In the Clarke Willmott 2021 Retirement Living survey, 51.56% of respondents said that these facilities were most important to them when looking for a retirement development.
Historically, the costs of providing communal facilities have been recovered by way of a ground rent and service charge. In our survey, 57.99% of Clarke Willmott’s respondents also said that cost of service charge and ancillary costs would be their main reservation about moving into a later living development. However, the Leasehold Reform (Ground Rent) Act 2022 (the “Act”), once implemented, will significantly restrict a developer’s ability to recover these costs from residents. The Act is part of the Government’s review of leasehold practices in England and Wales to determine whether leaseholders are being treated fairly. Once implemented the Act will prevent landlords in England and Wales from charging ground rents exceeding a nominal amount in new leases of residential properties. The Act is intended to protect tenants from high ground rents from which they receive no benefit, but the reforms may cause problems for developers of later living schemes going forwards.
Potential changes in the law
The Act was given Royal Assent on 8 February 2022 and accordingly is now an Act of Parliament, although it will come into force later (which is expected to be within 6 months of Royal Assent). As noted above, the purpose of the Act is to restrict the imposition of ground rents in new long leases of residential property for which a premium is paid being charged above a peppercorn (with some exceptions).
The Act is not retrospective and existing leases will be unaffected and will not require amendment. The Act does not affect the payment and collection of service charges. Disputes regarding service charge between landlords and leaseholders are relatively common but there is already legislation providing protection to tenants and it is important that the relevant provisions in later living leases and procedures in relation to the payment of those charges are compliant with current legislation.
During the Act’s review stage, the Select Committee received a range of responses from representatives within the later living sector. Whilst traditional letting schemes focus on achieving a high density of lettable units, the area occupied by communal areas within retirement developments can amount to up to 30% of the total floor space. Ground rents are often a central part of the funding structure of later living developments and they allow developers to provide and thereafter maintain the facilities enjoyed by the residents. Whilst the Government acknowledged that landlords of later living schemes do provide a higher level of service than could be supplied by the leaseholders themselves, they announced in January 2021 that the ban on ground rents (other than a peppercorn) would also apply to the later living sector. Section 25 of the proposed Act includes a small concession that the Act will come into force no earlier than 1 April 2023 in respect of leases of retirement homes (where the occupier must be aged 55 or over)
What are the issues to be aware of?
The ground rent paid by later living residents is usually higher than for a traditional new build development site where a higher density of dwellings and fewer amenities is common. Service charge contributions for later living residents can be thousands of pounds a year depending on the type of facilities available, the size of the dwellings and the estate. In addition, most potential purchasers will also be aware of the fact or be advised that they will be liable to pay an additional charge (usually based on a percentage of the sale price) if they (or their family) sell the property in the future to help keep the running costs manageable. Whilst developers need to ensure that the costs of maintaining the facilities are covered by the service charge and/or ground rent, they will also need to ensure that potential purchasers are not dissuaded by overly expensive costs, whether prior to the Act being passed or afterwards.
Following implementation of the Act, developers will need to consider how the ongoing costs of running a later living complex can be recovered without affecting the viability of developments and may face challenges in respect of sales if the income from charging ground rents is recovered from other heads of income which then are seen to rise. The Act only applies to leases granted after the implementation date (which is to be determined) and landlords of existing later living schemes will need to keep in mind that the measures will mean some occupants are charged ground rent, whereas some are not.
The Act specifies a number of penalties that can be applied should a ground rent greater than a peppercorn be set in an applicable lease once the Act comes into force. Landlords could face a financial penalty of between £500 and £30,000, and tenants will be able to reclaim unlawfully charged ground rents, plus interest. Trading standards, or a district council where this is no trading standards department will enforce the new rules within their area. As a result of the changes, developers may need to reconsider their funding models in order to continue providing the communal facilities currently located within many later living developments. Such measures which could be considered may include charging a higher premium for leases at the time of sale, levying a separate ongoing charge or making an additional charge for the use of some of the premium facilities.
The Act will come into force shortly and so developers will want to ensure that they keep an eye on the progress of the Act and consider how to adapt funding of any proposed later living developments. Clarke Willmott act for a number of developers who will want to ensure that they still provide high quality schemes with facilities suited to the later living market and, without falling foul of the new legislation, build viable schemes which can be maintained with a peppercorn ground rent.