Peppercorn Rent

What Leasehold Ground Rent Reform Means For You5th Apr 2022

by Nick Leedham on 5th Apr 2022

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Three Key Takeaways From The Leasehold Reform (Ground Rent) Act 2022

These are the main three points in the new Act:

  • no ground rents on new leases or lease extensions – only a peppercorn ground rent
  • ground rents for existing leases will not change – they can remain uncapped (or at least until further legislation is enacted)
  • there will be criminal penalties (fines of £500-£30,000 per qualifying lease) for freeholders/landlords that do not comply.

The new Act can be seen only as good news for leaseholders in the long term. The government says: “We firmly believe that the Act’s provisions will lead to fairer, more transparent homeownership for thousands of future leaseholders.”

But there’s a bit more to it than that. This is perhaps the most significant change to leasehold property law in a generation – so there are still important details that you’ll need to consider. 

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What Is A Peppercorn Ground Rent? Why Is It Still Needed If It’s So Low?

A peppercorn rent is a very low rent. It’s a nominal rent, a pittance so low that it’s not worth worrying about. But if the rent is so low, why is it needed? Why bother with it? Why not scrap it altogether?

A peppercorn rent matters because it’s needed to form a legally binding contract between the freeholder and the leaseholder. That’s because, under the law, every contract must have an offer, an acceptance and a consideration (something of value such as a payment or a promise to do or not to do something).

That’s true even if you’ve bought the freehold and are therefore both the freeholder and the leaseholder. (Yes, even if you’ve bought the freehold, you still need to have a lease. And you may still need to extend it…even if you’re the landlord as well as the tenant).

The whole concept of peppercorn rents may seem a bit strange at first glance. But they play an important role in making leasehold property law work for you. So embrace them – they’re saving you money.


When Will The Ground Rent Changes Take Effect?

Make no mistake – the new Leasehold Reform (Ground Rent) Act 2022 is now part of the law. It’s an Act, rather than a Bill. It received the Royal Assent on 8 February 2022.

But for these leasehold ground rent reforms to become law in a practical sense that affects you, they require some enabling regulations. So the new rules will not come into effect until 30 June 2022.

That may seem like some time away, given how long overdue this reform has been. But the Association of Leasehold Enfranchisement Practitioners (which welcomes the changes) has warned that it gives people little time to prepare.


What Happens If I’m Buying A New-Build Home On A Housing Development?

The new Act came about after the scandal over doubling ground rents at housing developments. Britain’s housebuilders are now addressing that issue after the Competition and Markets Authority (CMA) intervened to protect consumers. Developers are having to revise controversial ground rent clauses in their leases.

But what does the new Leasehold Reform (Ground Rent) Act mean for buyers of new-build homes on housing developments? After the CMA intervention, how does the new legislation take things forward? The answer is ‘positively’…but it could result in a bit of neighbourly envy on housing developments that are not yet complete.

Here’s the situation…

If you’ve already bought a leasehold property on a new-build development, then the developer may have written to you, offering to reduce your ground rent, stopping it from doubling. They are not obliged to do so but – under pressure from the government – many developers have committed to offering deeds of variation to help lessen the impact of the original ground rent clauses. Contact us if they haven’t yet written to you yet, or if you need help following their letter.

While they may reduce your ground rent, it may still be higher than a peppercorn. And it could still increase – depending on the offer. Remember, you have an existing lease, not a new one.

So Britain’s half-built housing developments may comprise a mix of existing leaseholders paying an uncapped ground rent…and future leaseholders paying a peppercorn rent under the new law when it takes effect. Two neighbours in virtually identical properties could pay very different ground rents.

But as leasehold specialists, we remain optimistic; the tide has turned against ground rents. Hopefully, ground rents on existing leases will be phased out – ie, changed to peppercorn rents – over coming years.

In any event, this is something that leaseholders already have within their power. They have the right to extend lease length by 90 years and reduce the rent to a peppercorn under the Leasehold Reform, Housing and Urban Development Act 1993. Contact us to find out more about this.
 

Other Important Considerations

The new rules on leaseholders’ ground rents also cover fees charged in connection with them. So the freeholder/landlord can’t simply rebrand ground rent as a ‘ground rent administration fee’.

This new legislation affects properties with long leases – more than 21 years – not assured shorthold tenancies. Nor does it affect business leases, statutory lease extensions of houses and flats, community housing leases and some home finance plan leases.

Buyers of leasehold retirement property need to be particularly careful. That’s because the new Act may not cover them for some time. The Leasehold Reform (Ground Rent) Act will come into force for retirement properties no earlier than 1 April 2023.

Enforcement action can be taken against past and current landlords – and anyone acting on their behalf. So if you’re acquiring land or buying the freehold you need to consider the risk of a previous landlord’s liability.

The legislation will be enforced by local authorities’ trading standards departments. And they’ll get to keep the money to fund future enforcement. So don’t expect them to be shy when it comes to enforcement. There’s a very real financial incentive for them to enforce the law to the letter.


Get Expert Legal Advice

Worried that you may be paying too much in ground rent? Anxious about how best to comply with the new changes in the law?

Get expert legal advice from leasehold specialist Nick Leedham, an Associate Solicitor based at our Bournemouth office.