The Leasehold Reform (Ground Rent) Act 2022

The Leasehold Reform (Ground Rent) Act 2022 (“the Act”) comes into force on 30 June 2022, although it will not come into force for retirement properties before 1 April 2023.

The Act brings with it one of the most significant changes to property law for some years by putting an end to ground rents in new, qualifying long residential leasehold properties in England and Wales.

Once the Act comes into force, ground rents in most new leases cannot (legally) be anything more than a peppercorn, which in effect means that no money should be charged as ground rent in leases regulated by the Act. Landlords will also be prohibited from charging an administration charge for collecting a peppercorn rent. Contracts to grant leases entered into before the Act comes into force are not affected.

The Act will apply to any “regulated lease” which is defined as:

• a long lease of a single dwelling;
• granted for a premium;
• on or after the relevant commencement day, other than in pursuance of a contract made before that day; and
• it is not an excepted lease.

“Excepted leases” are: (a) certain business leases; (b) statutory lease extensions; (c) a community housing lease; or (d) a home finance plan lease. Each of these exceptions is set out in detail in the Act and would need to be reviewed carefully to see whether any exceptions apply. For example, Regulations have been passed to provide that where use of the premises for business purposes is expressly permitted by the lease and the use of the premises as a dwelling significantly contributes to the business purposes, the lease will be excepted from the 2022 Act if the landlord and tenant (or prospective landlord and tenant) each give the other a written notice to that effect. There are also different rules that apply in respect of shared ownership leases (Section 5 of the Act) so that the requirement for a peppercorn rent applies only to the tenant’s share and for what are described as ‘replacement leases’ where the new lease of the same premises includes (in part) a period of time covered by the previous lease. In this case the requirement for a peppercorn rent need only apply in the new lease after the overlap period with the previous lease has elapsed.

The Act imposes fines of between £500 and £30,000 which may be levied where the enforcing authority is satisfied beyond reasonable doubt that there is a breach of the Act.

Clearly this is a significant change to the way in which residential leases operate but the Act is not retrospective in its effect. This means existing long leases with ground rents may be less attractive to buyers than a new regulated lease subject to the Act. This may affect those trying to sell their lease after 30 June this year or those with an investment interest seeking to grant an underlease.

Developers, investors and landlords can do little but consider the impact of the changes on their operations. The sale and purchase of an investment in the ground rent reversion of a development will no longer be possible. For those who are involved in ground rent reversion investments care will need to be taken where a development straddles the start date of the Act to determine the date of grant of lease and any associated contract to determine whether or not a ground rent can be lawfully charged.

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