Ground rent will be capped at £250 per annum if government proposals, currently under discussion, are approved.
The draft Commonhold and Leasehold Reform Bill were published in January week (Tuesday 27 January).
It must pass the House of Commons and the House of Lords before being made law.
Under the proposals, landlords will not be able to charge tenants more than £250 per annum in ground rent saving tenants hundreds, or in some cases, thousands of pounds each year. This is beneficial to all tenants paying ground rents, but particularly helpful to tenants of leases with rent review mechanisms which has made their flats un-mortgageable and unsellable.
Why cap at £250 per annum?
A penny over £250 per annum and by good fortune, and poor legislative drafting, the landlord acquires a very draconian tool that could entitle the landlord to a windfall.
The Housing Act 1988 introduced assured tenancies. Assured tenancies or assured shorthold tenancies are short tenancies of at least six-month terms and the Act gave landlords grounds for taking back possession of their properties.
If or when a tenant fails to pay rent, Ground 8 applies. Ground 8 is a mandatory ground for possession used when a tenant has serious, persistent rent arrears.
In cases where this is applied the Court has no-discretion and has to order possession, there is no right to appeal, there is no right to apply for relief from forfeiture, and the tenant receives no compensation for the investment they have lost.
To distinguish short tenancies from long leases the legislation includes a safeguard that Ground 8 applies only if the annual ground rent exceeds £250, or £1,000 in London, but with inflation it was not very long before £250 was being reached for leases granted since the 1990’s either immediately or during the term of the lease. Lenders and buyers became aware of this and before lending or buying would make a condition that the lease is varied to remove the risk.
Some landlord’s obliged and some would only do so if paid thousands or tens of thousands of pounds. This, therefore, is a likely reason as to why the cap has been set at £250.
There is another benefit to the cap for leaseholders. A lease gives a tenant occupation for a set number of years and before running out of years a tenant can purchase an extension of time. The factors in calculating the price for buying more years are the ground rent, the number of remaining years of the lease term, the value of the property, and if less than 80- years there is also marriage value to pay.
Consequently, if the ground rent is capped and/or eliminated of the cost of extended the lease term also reduces. Furthermore, the PM said that after forty years of the cap the rent would reduce to a peppercorn, i.e. £0.
There is also an attempt to rejuvenate commonhold by introducing a mechanism for tenants to convert from leasehold to commonhold. Commonhold refers to a form of freehold specifically designed for multi occupancy developments such as flats, one of the benefits being that it eliminates the need for a third-party landlord and enables unit owners to own their property outright. The Commonhold and Leasehold Reform Act 2002 introduced the concept of Commonhold but there was little or no take up by builders and landlords but by giving the option to tenants we may see it take off.
