The Queen’s Speech 2021 – Leasehold Reform

PM intro “We will build back fairer, giving everyone the chance to realise their potential
regardless of where they are from, or their background. Central to this is giving more
people the chance to own their own home, making renting fairer and effectively
abolishing ground rent on new long residential leases”

Leasehold Reform (Ground Rent) Bill

“Laws [to modernise the planning system]…will be brought forward, along with
measures to end the practice of ground rents for new leasehold properties.”
The purpose of the Bill is to:

• Tackle the inconsistency and ambiguity of ground rents for future leaseholders.
  The Government is legislating to require that – for the first time – ground rents in residential long leases will have no financial demand. These will be set in law as a ‘peppercorn rent’ level (the legal term), meaning that nothing more than a literal peppercorn can be sought from leaseholders.

The main benefits of the Bill would be:

• Ensuring leaseholders of new, long residential leases cannot be charged a financial ground rent for no tangible service, making leasehold a more transparent and fairer system for homeowners.

The main elements of the Bill are:

• Restricting the charging of ground rents on new long residential leases.
• Enforcing the charging of a prohibited ground rent by way of a civil penalty
  regime, including fines of up to £5,000 for freeholders that charge ground rent in
  contravention of the Bill.
• Ensuring that there can be no financial demand for ground rent for all future
  qualifying leases so that future leaseholders do not face unfair terms or significant ground rent liabilities.
• Having only selected exemptions, including:
  • Some parts of the community-led housing sector, so they can retain the
    right to levy ground rent to maintain their ability to further promote
    community activities.
  • Certain financial products which depend on leases where rent replaces
    interest bearing mortgage payments, such as those drawn on by the older population for a type of equity release and the growing Islamic finance sector.
  • Business leases, to allow people who need to live in the same premises as
    their workplace to continue to do this and agree with their freeholder the most beneficial and appropriate terms.

Territorial extent and application

The provisions in the Bill will extend and apply to England and Wales.

Key facts

• Leasehold has always been a common form of ownership for flats. Historically,
  ground rents in leasehold contracts would require the payment of no or little
  financial value (a peppercorn) and only be used as a nominal consideration to
  form a leasehold contract, as opposed to a payment for any type of service.
• The Government has asked the Competition and Markets Authority (CMA) to
  conduct an investigation into potential mis-selling in the leasehold sector, which
  includes the problem of onerous ground rent terms.
• The CMA published an update in March 2021 and has issued consultation letters
  to two housing developers in relation to possible breaches of consumer protection
  law in the residential leasehold sector. Progress on the investigation can be found
  on the CMA website.

Commonhold or other leasehold reform

The only item around Leasehold Reform announced in the Queen’s Speech relates to ground rent.

The Prime Minister’s introduction to this stated that the Government intention is “effectively abolishing ground rent on new long residential leases”.

There has been no mention made of their Governments intentions as regards Commonhold or wider Leasehold Reform around enfranchisement in response to the recommendations made by the Law Commission after consultation.

The Leasehold Reform (Ground Rent) Bill is to include measures to end the practice of ground rents for new leasehold properties. In addition to the Bill is to introduce Laws to modernise the planning system

So the Government will legislate to require that ground rents in new residential long leases are set at a ‘peppercorn’ instead of a financial sum.

This is stated to relate to new not existing leases. However previous announcements around this mean that it may have this effect as the application of the restriction may be back dated intime and it is likely to affect the terms on which leases are extended.

Enforcement is to be via civil penalty with fines of up to £5,000 for freeholders that charge ground rent in contravention of the Bill.

There are to be some exemptions including:

• Elements of the community-led housing sector “so they can retain the
  right to levy ground rent to maintain their ability to further promote
  community activities”.
• Certain equity release and Islamic Finance products that utilise lease rents in place of interest.
• Business leases “to allow people who need to live in the same premises as
  their workplace to continue to do this and agree with their freeholder the
  most beneficial and appropriate terms.”

The detail around this remains to be seen.