The Leasehold Reform (Ground Rent) Bill received Royal Assent on 8 February 2022 meaning it is now an Act of Parliament (law) – although its provisions will not take effect until the day appointed by the Secretary of State via regulations.  

Described by the Government as ‘’part of the most significant changes to property law in a generation’’, once in force the Act will abolish ground rents for qualifying residential long leases.

Peppercorn rent

The Act limits ground rent to a ‘peppercorn rent’. A peppercorn rent has no financial value; the term refers to the traditional practice of providing a peppercorn as a form of token consideration to make a binding contract.

The rationale behind the limit is to prevent leaseholders becoming trapped by rapidly escalating ground rents and in turn create fairer, more transparent ownership for leaseholders.

The Act also prohibits administration charges for peppercorn rents as an anti-avoidance measure.

What leases does it apply to?

The Act will apply to residential long leases granted for a premium and entered into from and including the day the law comes into force. A long lease is a lease for a term of more than 21 years.

However, where there is a deemed surrender and re-grant of an existing residential long lease due to a fundamental variation e.g. by extending the term of the lease or adding additional property to its demise, the new lease granted will still be caught by the Act regardless of whether it is granted for a premium.

The Act excludes some leases. These include business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases.

Different rules apply to other categories of leases. The provisions will not apply to retirement properties until 1 April 2023 and if a voluntary lease extension is granted the Act will only bite on expiry of the original term, even where there is a deemed surrender and regrant due to a change in the demise of the lease. The Act applies to shared ownership leases, but a Landlord can continue to charge rent on their share of the property.

Sanctions for non-compliance

If ground rent is demanded in contravention of this Act and any payment received is not returned within 28 days, the landlord will face a fine ranging from £500 – £30,000 per qualifying lease.

Additionally, a leaseholder under a qualifying lease has the right to apply to the First-Tier Tribunal (Property Chamber) in England for a declaration that a term reserving prohibited ground rent is replaced with peppercorn rent.

Commercial considerations

• Landlords will need to be familiar with the provisions of this Act to avoid incurring liability due to non-compliance.
• The Act is not retrospective, so leases entered into before the Act comes into force can still demand ground rent uncapped. However, the Act is only one part of the Government’s wider leasehold reform scheme and further measures could be included to cap ground rent.
• A lease entered after the Act comes into force, pursuant to an option or right of first refusal pre-dating the Act, will still be subject to its provisions.
• A landlord demanding ground rent under a lease pre-dating the Act should be cautious to not inadvertently vary a lease to the extent it amounts to a surrender and regrant. A regrant after the Act comes into force means its provisions would apply and ground rent would be capped at a peppercorn rent.  
• Enforcement action can be taken against past and current landlords, as well as persons acting on their behalf.  Due diligence enquiries should therefore include the possibility of past landlord liability when acquiring land subject to residential long leases.

For more information please contact Birketts’ Specialist Housebuilders Team.