The Government’s proposal around leasehold ground rent reform has now taken shape following the Queen’s Speech.
In 2018 the then Secretary of State for housing communities and Local Government, Sajid Javid, announced a “crack down on unfair leasehold practices” that would include setting ground rents on new long leases at zero and working with the Law Commission to make the process of purchasing a freehold or extending a flat lease “much easier, faster and cheaper”.
Following consultation in 2018 the Government’s response provided more detail i.e. that the ban was to come into effect immediately upon the legislation coming into force as opposed to there being any transitional period.
Two years on legislation on the regulation of ground rents has been announced in the Leasehold Reform (Ground Rent) Bill but uncertainties remain.
We are also yet to see what the Government decides to do with the Law Commission’s recommendations around Enfranchisement and Commonhold.
At first blush developers may be seen at risk of suffering a shortfall where they have taken a development lease with a fixed rent in the expectation that they would be able to recover that rent via the onward leases of flats to be granted once the development is completed. However there may be unintended consequences for their landlord as regards the knock on value that their interest may in turn suffer as a result of the enfranchisement legislation.
Developers (and freehold investors) will need to examine the dates on which their buyers contract to buy units off plan as compared to the commencement date of the Bill.
For landlords it is still not known how the premium may in future be calculated on enfranchisement of regulated leases by flat owners.
The key issue is the Bill’s “commencement date” as that will determine what is a regulated lease and what is not.
- While the commencement date for retirement home properties will not be before April 2023 and we still don’t know the fate offlat leases granted between 22 December 2017 and the Bill’s commencement date..
- Nor do we know: which home equity schemes will be caught
Queen’s Speech and Commencement Date
The Prime Minister’s announcement that legislation is to be introduced “abolishing ground rent on new long residential leases” is only the headline.
Interestingly, the Bill states that regulation of new (but not existing) residential long leases will start from a commencement date to be announced after the Bill is passed;. Previous announcements indicated that the application of zero ground rents would be back-dated.
There has been some comment that the Bill will commence in the “third session” of the current Parliament so that might not be until sometime between May 2023 and May 2024.
The Government has stated that for retirement home leases the earliest date from which the changes will apply will be 01 April 2023.
Once the changes commence, enforcement will be under threat of a civil penalty with fines of up to £5,000 for freeholders that charge ground rent in contravention of the new restrictions.
Commonhold and Enfranchisement
So far, there has been no further mention made of the Government’s intentions for Commonhold or wider Leasehold Reform around enfranchisement in response to the recommendations made by the Law Commission on 21 July 2020.
However, the Commonhold Council has now been established to look at the various options.
Leasehold Reform (Ground Rent) Bill
The Bill deals with the following ground rent matters:
Which leases are caught?
For a lease to be caught by the new ground rent regulation (known as a regulated lease) it must be:
- a long lease, which is normally a lease originally granted for more than 21 years – break and forfeit rights aren’t take into account); must be
- of a dwelling; and
- is granted on or after the commencement of the legislation once enacted (see above) unless it is granted pursuant to a contract entered into beforehand – the trap here is that often a variation of an existing residential lease is deemed a surrender and regrant so, in that case, it would become a regulated lease but see below about preservation of existing ground rent;
but does not apply
- to an excepted lease.
Excepted leases are:
- Business lease – a lease that expressly permits business use without further consent from the landlord and where the nature of the business purpose allowed means that use of the premises as a dwelling significantly contributes to it. Prior to the lease being granted the parties must each notify the other in writing that they intend the premises to be used for qualifying business purposes. There is room for further regulations to be made around the form and content of those notices. Business for this purpose includes a trade, profession or employment but excludes a home business (section 43ZA of the Landlord and Tenant Act 1954); or
- Statutory lease extensions – this will cover new leases of flats and houses granted under the relevant enfranchisement legislation. Flat lease extensions specify a peppercorn ground rent in any event – the reform of enfranchisement includes proposals that will set rents on house lease extensions at the same level; or
- Community housing leases – in addition to being a community housing lease as defined in section 2(7) of the Bill that meet further conditions to be specified in regulations issued in future; or
- Home finance plan leases – are those granted by a finance provider to a home buyer pursuant to a rent to buy arrangement (as defined in section 2(10) of the Bill) that meet further conditions also to be specified regulations to be issued in the future.
The legislation will operate by prohibiting a landlord under a regulated lease from requiring their tenant to make payment in excess of the permitted peppercorn or, if demanded, failing to refund it within 28 days of receipt.
Shared ownership leases
Shared ownership leases are treated differently.
As regards permitted rent; the peppercorn rent applies in respect of the tenant’s share and the landlord is able to charge an additional rent in respect of its share. This landlord share falls away once the tenant staircases to 100%. If the lease doesn’t apportion the rent attributable to the tenant and the landlord then any rent that is reserved is deemed to be wholly attributable to the landlord’s share.
Voluntary/non-statutory lease extensions
For those extending existing leases with their landlord (outside permitted enfranchisement) special arrangements apply to ensure that even if the existing lease is treated as having been surrendered and a new one granted, the landlord does not lose the benefit of the rental income stream it was otherwise entitled to under the existing lease (known as a pre-commencement lease).
So, the landlord can retain the previous structure of ground rent under the new lease for the period that was covered by the pre-commencement lease. After that it must drop to the peppercorn level.
For example, if a lease has 50 years left to run with a level ground rent of £250 per annum then the new extended lease can specify a rent of £250 per annum for the first 50 years but then it must specify a peppercorn rent after that.
Breach and enforcement
Where a lease reserves a prohibited rent it will be treated instead as reserving only the permitted rent.
Enforcement will lie with the local Weights and Measures Authority in England and Wales or a District Council where there isn’t a local WMA in England, known as the enforcement authority.
Financial penalties for breach of the changes are payable within a range of £500 to £5,000 (there is power to change these limits in the future). In the case of enforcement of multiple breaches by the same landlord in respect of a given lease, only one penalty may be imposed but a previous penalty for other breaches won’t prevent a further one being imposed.
A landlord will not escape liability by selling its interest nor will a tenant lose its ability to pursue a selling/sold landlord for repayment of prohibited rent.
While the imposition of financial penalties requires the enforcement authority to be satisfied beyond reasonable doubt that the person has breached the regulations, the recovery of prohibited rent by the tenant only requires the enforcement authority to be satisfied on the balance of probabilities that the tenant paid a prohibited rent and that in breach of the section it has not been refunded to the tenant.
The enforcement authority can order the landlord to refund any prohibited rent to the tenant plus interest by making a refund order. It can also order the current landlord at the time the refund order is made (who might be innocent of any wrong-doing) to refund prohibited rent to the tenant (plus interest). It can also make a refund order against any collecting agent of the landlord(s) who received the prohibited rent without the tenant having to first bring proceedings against the landlord(s).
For freehold buyers (and property agents) this is going to be a major risk which will need to be investigated before acquisition but see declaration orders below.
A tenant can still make an application to the First-tier Tribunal for a recovery order for a refund of prohibited rent but the FTT cannot make its own order if a refund order has already been made by an enforcement authority for the same prohibited rent but the refund has not yet been received by the tenant.
Prohibited Rent Declarations
Either party to a lease can apply to the FTT for a declaration if any rent payable under a regulated lease is to be treated as a prohibited rent or permitted rent.
The FTT may have regard to the effect of “the terms of the lease” which in turn includes “the terms of any contract relating to the lease”. It is not yet clear whether this is an attempt to draw in, for example, a ground rent payable pursuant to a headlease.
Enforcement Authority Assistance
An enforcement authority may assist a tenant (but not a landlord) apply for a FTT recovery order, FTT declaration or in further proceedings to enforce payment to the tenant under a recovery order.