Good news for those looking to buy a home – the Government is implementing significant changes to property law on charging ground rent on new leases in England and Wales under the Leasehold Reform Ground Rent Act (LRGRA 2022). When it comes into force on 30 June 2022, it will mean that property purchase bills will be reduced when the government’s ban rids future homeowners of this annual cost.
The purpose of the Reform Ground Rent Act is to make owning a leasehold residential property fairer, more transparent and more affordable and to fulfil the government’s commitment to set future ground rents to zero.
There will also be further measures to come in 2023, when the provisions will apply to retirement homes from 1st April 2023, ensuring that those living in retirement homes benefit from the same reforms as leaseholders.
What is ground rent?
If you own a property with a long lease, you will normally have to pay rent to the freeholder or landlord of the property; known as ground rent. For shared ownership leases the rent charged in respect of the tenant’s equity share in the property, however, the amount payable in respect of the landlord’s equity share can be any rent.
Ground rent bills are charged at anything from a peppercorn per year to hundreds of pounds a year on both houses and flats, and these charges provide no clear service in return. They can be set to escalate regularly, meaning a significant financial burden for leaseholders. The reform is welcomed because it will help homeowners manage their bills as they face the cost of living increases.
The government have described the Leasehold Reform Ground Rent Act as “part of the most significant changes to property law in a generation”.
The lease will generally specify how much ground rent you have to pay if it is fixed or escalating and when payment is due; annually, quarterly etc. Normally, the rent will be quite low and is often in the region of £50 per year, and if ground rent is fixed, it means that it would remain unchanged throughout the term of the lease.
However, ground rent can be escalating and increase during the course of the lease which can be extremely expensive in the case of some modern flats, whilst most ex-local authority flats have a ground rent of £10 per year. For example, in a typical 99-year lease the ground rent might be set at £100 per annum for the first 33 years and then increase to £250 per year for the next 33 years and then £500 per year for the final 33 years.
Leasehold Minister, Lord Stephen Greenhalgh said: “Abolishing these unreasonable costs will make the dream of homeownership a more affordable reality for the next generation of homebuyers.”
Technically, you do not have to pay a ground rent unless the landlord has formally asked you to pay with any demand in writing. If you do not pay the ground rent when it has been legally demanded the freeholder could take you to court to recover the debt. In extreme cases, the landlord could commence forfeiture proceedings, which means that the landlord tries to recover possession of the property.
They could do this if the amount outstanding is as little as £350, and you have been in arrears for three years or more.
What does the reform mean for Freeholders and Landlords?
In preparation, many landlords will already have reduced ground rent to zero for homebuyers starting a new lease with them. Anyone preparing to sign a new lease on a home before 30 June should ensure their ground rent rate reflects the upcoming changes.
Lord Stephen Greenhalgh also said: “I welcome the move from many landlords who have already set ground rent on their new leases to zero and I urge others to follow suit ahead of this becoming law.”
The LRGRA 2022 will apply to new residential long leases that are entered into when the law has come into force. Long leases are leases which are for a term of more than 21 years, and do not include short-term tenancies. Leases that are not included in the Act are business leases, statutory lease extensions, community housing leases and home finance leases.
Landlords who fail to comply with the new legislation could face financial penalties ranging from £500-£30,000, for each qualifying lease. If a leaseholder inadvertently pays ground rent incorrectly demanded by a landlord, it must be returned within 28 days, or the leaseholder will be entitled to claim the rent back, with interest.
You can find out full information on the Government’s LRGRA 2022 Press Release