The Leasehold Reform (Ground Rent) Bill has recently had its third reading in the House of Commons and is expected to become law. The purpose of the legislation is to prohibit ground rents for new residential leases in England and Wales.

What rent will the Bill control?

Once the Bill comes into force, newly created long leases of residential property (defined in the Bill as granted for a term exceeding 21 years) granted for a premium will only be permitted to charge ground rent of “one peppercorn” (a token of no financial value).

In what circumstances will the prohibition apply?

The prohibition on ground rents will apply in the following circumstances:

  • newly granted long leases of residential property;
  • it will not apply retrospectively to existing residential long leases;
  • it will not apply to business leases, community housing leases or home finance plan leases;
  • if a landlord grants a voluntary (non-statutory) lease extension, it will only apply from the start of the extension period;
  • it will not apply to statutory lease extensions granted under either the Leasehold Reform Act 1967 or the Leasehold Reform, Housing and Urban Development Act 1993 because those already provide for extensions with a ground rent of a peppercorn;
  • in shared ownership leases, the landlord will only be permitted to charge rent on the share of the property which the tenant does not own;
  • the Bill will have a delayed effect on leases of retirement homes, with its provisions applying only from 1 April 2023.

What are the sanctions for non-compliance?

If a landlord breaches these rules, the local authority may impose a fine of between £500 and £30,000 per breach, so this fine could multiply to a significant penalty for larger landlords.

Leaseholders may also appeal to the First-Tier Tribunal (Property Chamber) to recover any prohibited rent, with interest.

What will happen next?

The Bill is expected to pass before the end of the current Parliamentary session and the Government has said that the Bill would be commenced within 6 months. Therefore, the rules may be in force before the end of 2022.

The Government has also committed to further legislation to reduce ground rents on existing residential leases to zero, although no draft legislation has yet been proposed.

For further information, please contact Paul Jagger or Andrew Nicklinson.