Reform of Leasehold Legislation

News

Long leasehold rents have risen greatly over the past decades and continue to increase. Not only does this have the obvious impact of higher rent payments, it also increases the risk of eviction and prevents many tenants from extending their lease. The Leasehold Reform (Ground Rent) Bill has been introduced to curb ground rent increases in England and Wales. This article highlights the main issues with the current law and sets out the key changes proposed by the Bill.

The Issues

There are three main issues being addressed by the Leasehold Reform (Ground Rent) Bill. They are:

1. Unsustainable rent levels;

2. The creation of assured tenancies; and

3. Difficulties with lease extensions.

Unsustainable rent levels

The obvious implication of high ground rent is that tenants become unable to pay their rent. Many ground rents have now reached levels of 0.1% of the property’s value, which is a substantial obligation on the tenant, who may also be paying further charges for maintenance and parking.

In addition to high ground rents, the rent review periods in many residential leases are getting shorter and allowing for greater increases. The Government review leading to the Bill gave the example of an initial ground rent of £295 per annum increasing to £9,440 per annum in just 50 years.

Not only does this make it increasingly difficult for tenants to make ends meet, it also prohibits their ability to sell the leasehold and get out of these onerous obligations.

Assured Tenancies

Where the ground rent exceeds £250 (or £1,000 in Greater London) per annum, a residential lease is classed as an ‘assured tenancy’. The landlord to an assured tenancy has many grounds on which to apply to the court for mandatory repossession. The most significant of these grounds is where there are rent arrears of two months’ worth of rent, although the exact figure alters according to the rent payment frequency.

Once the landlord has proven the required arrears, the court must order the eviction of the tenant. This is in direct contrast to other kinds of leases, where the tenant has the right to apply for relief against eviction at court.

Even if the ground rent set in the lease is below £250 or £1,000, there may be provisions within the lease for the rent to increase beyond those rates. Such leases become assured tenancies the moment the ground rent crosses that threshold.

Many mortgage lenders are now refusing to loan where there is or could be an assured tenancy. This is making it increasingly difficult for people to get onto the property ladder, as well as making it more difficult to sell or re-mortgage a leasehold property.

Lease Extensions

Tenants of leasehold flats have certain rights to request that their landlord extends the lease and reduce the ground rent to a peppercorn. In doing so, the tenant pays a premium (i.e. a lump sum, similar to a purchase price) to compensate the landlord for the loss of future income. As the premium is based in part on the rent, excessive ground rents mean that many tenants are unable to make use of this mechanism.

The Bill

Regulated Leases

If passed into law as it currently stands, the Bill will essentially abolish ground rents on certain leases. It only applies to leases which are:

• Long leases of a single dwelling;

• Granted at a premium;

• Granted on or after the Bill comes into force; and

• Not otherwise excepted (e.g. business leases).

A long lease is one which is granted for a term of at least 21 years. The Bill will not, therefore, cover residential leases for a shorter term, even where the tenant remains in occupation for 21 years under an assured tenancy. It will also not apply to residential leases of any term where granted free of a premium.

Leases which already exist when the Bill comes into force will not be caught by the new provisions, either, although there may be exceptions where extending an existing lease after that date.

Permitted Rent

Under a regulated lease, the ground rent cannot be anything other than the payment of one peppercorn per year. Different rules apply to shared ownership leases and leases made in replacement of existing ones.

If a tenant makes a ground payment of anything other than this peppercorn, the landlord must return it within 28 days of payment.

Duty to Inform

There may be a gap between the date the Bill becomes law and the date on which the specific provisions on rent come into force. During this time, landlords of regulated leases will be under a duty to inform potential tenants of these changes, the intention being to give tenants the knowledge that they could wait and have a lease balanced more in their favour.

Enforcement

The provisions of the Bill will be enforced by the local Weights and Measures Authority.

Landlords who charge anything other than a peppercorn, or do not return other payments within 28 days, are liable to a fine of £500 to £30,000. They may also be required to make a refund, and interest may be applied on that amount. The same rules and penalties apply to those acting on the landlord’s behalf, such as managing agents.

Landlords who have not informed tenants of the incoming changes can also be fined between £500 and £30,000.

Tenants who have paid a ground rent other than a peppercorn, and have not been refunded within 28 days can apply to the Tribunal for a recovery order. The local Weights and Measures Authority has the power to assist the tenant in making this application. They may also assist directly in the recovery of the payment following the Tribunal’s order. It is expected that this assistance will involve conducting proceedings and giving advice to tenants.

Conclusion

The Bill, if brought into law, will see the abolition of ground rent in a large number of new leases, but there are many exceptions. Landlords and tenants alike should keep updated on this as the Bill passes through Parliament, and should also look out for future changes planned to be made in the coming years.

For further advice on Leaseholds, please contact a member of our Residential Property team.

Girlings has offices in Ashford, Canterbury and Herne Bay.

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