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Ground Rent Prohibition to Catch Non-Statutory Lease Extensions


The government has now responded to the consultation around ground rents as alluded to in the community secretary, James Brokenshire MP’s speech to the Chartered Institute of Housing Conference recently. This flows from Sajid Javid’s announcement in December 2017 as secretary of state in this regard.

Other measures will ban houses being sold on a leasehold basis in certain circumstances, give freehold house owners similar service charge protections to those enjoyed by flat owners and prescribe time limits and fee caps for the provision of management information by a landlord to the leaseholder for use in their sale.

Where there had been discussion around capping ground rents in new long residential leases at £10 per annum the government has decided to set a zero ground rent in effect. The new rules will come into effect as soon as the legislation is introduced.

There are some exemptions namely for community led housing schemes, retirement properties, mixed use leases (so a single lease of a building that comprises both commercial and residential elements) and certain home reversion plans.

Those respondents to the 28th consultation in this regard who had argued for an exemption in respect of voluntary lease extensions will be disappointed.

This is not necessarily a boon for flat owners; as ever there may be unintended consequences.

When a flat owner needs to extend their lease they can go through the statutory procedure where they qualify and their circumstances permit i.e. they have the time and money.

Many flat owners only become aware of the need to extend their lease when selling their property and so they don’t have sufficient time to pursue the statutory process. They may also have insufficient funds to meet the premium and costs payable in this connection.

In that case they might be able to commence the statutory process for a buyer to take over but this will be of no assistance if the buyer in turn is obtaining a mortgage and the existing lease term is too short to be acceptable to the lender.

So many flat owners will be forced to seek to negotiate a lease on voluntary terms with their landlord.

If legislation is introduced in line with the government’s response to the consultation then the landlord will not be able to obtain a ground rent income beyond the date on which the existing lease would have fallen in or at a higher level.

While that seems good news from a flat owner’s point of view it may in fact operate to reduce the incentive for landlords to entertain the grant of a voluntary lease extension and so lead to more sales falling through or, where they are open to it, to call for a higher level of premium to compensate for the ground rent income stream they might otherwise have hoped to benefit from.

The related sanctions will cause landlord’s pause for thought as flat owners will have the right to apply for a refund of the rent and any associated costs without time limit which, depending on how the legislation is drafted, may cause a significant loss to the buyer of a freehold reversion. In addition courts are to have the power to impose a civil fine of up to £5,000 per property where freeholders charge ground rent in breach of these restrictions.

So it is mixed news for both flat owners and their landlords including professional ground rent investors.

For the detail behind the other measures proposed by the government in response to the consultation click here.

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