What is Ground Rent?
In simple terms, a ground rent is a contractual rental payment for the occupation of the land on which a property sits. It is usually paid annually by the owners (or tenants) of residential properties let under a long lease to their landlord and the tenant does not receive any services in return for the payment of ground rent.
Landlords have therefore benefitted from an annual income from the payment of ground rent by their tenants, with many landlords, particularly developers and investors, realising the potential future revenue streams from the strategic use of ground rents. Many took the opportunity to increase ground rents when negotiating non-statutory lease extensions and new leases were often granted to include provision for the ground rent to be increased on a more frequent basis and at a higher rate (even doubling at times). It was not unusual to see a ground rent being reviewed every 5 to 10 years.
The impact of such substantial ground rent increases meant these properties were being adversely affected on valuation. Consider a £250 ground rent doubling every 10 years over the course of a 125 year lease – within 50 years the ground rent would rise to £8000 and by 100 years this would rise to £256,000.
Solicitors started to warn purchasers off buying properties with such excessive ground rents and lenders began to refuse mortgages for such properties. As demonstrated above, excessive ground rents can significantly affect the value and saleability of the property and unless the tenant is a qualifying tenant able to force an extension of the lease under the Leasehold Reform Housing and Urban Development Act 1993, which in itself can be an expensive process, they are powerless to change the contractual terms of the lease as the landlords were simply not obliged to agree to a variation of the ground rent provisions.
Following many years of campaigning, there has been a recent charge in the law effected by the Leasehold Reform (Ground Rent) Act 2022 which puts an end to ground rents for most new long residential leasehold properties in England and Wales. The Act came into force on 30th June 2022 and is intended to make home ownership fairer and more transparent for millions of future leaseholders.
In essence, the Act means that the ground rent included in a new regulated residential long lease where a premium is paid may not exceed more than one peppercorn per year.
The Act defines a peppercorn rent for the first time as ‘an annual rent of one peppercorn’ – a historical throwback to when a landlord would accept a peppercorn for his grinder in lieu of money. In practice, peppercorn rents are not collected (unless of course the landlord is short of seasoning!)
What is a Regulated Lease?
You will have seen the peppercorn ground rent is only required in regulated new leases. Non-regulated leases and excepted leases are excluded from the provisions of the Act.
Generally, a lease will be regulated by the Act where:
- It is granted on or after 30 June 2022
- It is a long lease (exceeding 21 years) for a single dwelling
- It was granted for a premium (a premium is usually known as the “purchase price”), this also includes where a lease has been changed (referred to as ‘varied’) by a ‘deemed surrender and regrant’ and no premium was required
- It is not an excepted lease, see below
When does the Act not apply?
The Act will not apply where:
- A lease is not a regulated lease
- Buyers and sellers enter into a legally binding contract (i.e. exchange of contracts) for the grant of a lease (other than an option or right of first refusal) before 30 June 2022, even if the lease itself is granted after 30 June 2022
- Leases are for of community-led housing, certain financial products, and business leases
- Voluntary or non-statutory lease extensions, which can retain the existing level of ground rent for the remainder of the original lease period
- In a shared ownership lease, where rent is payable on the landlord’s owned share and the peppercorn rent limit applies to the leaseholder’s owned share
Once again, these trail behind and there is a transition period that applies to regulated leases of retirement homes, which means the Act will not come into force for these leases any earlier than 1 April 2023.
Does this solve the problem?
The change in the law helps control ground rent for new leases but fails to address the problem with existing leases that already include excessive ground rents. The owners of these properties will continue to face ground rents that affect their ability to sell and mortgage their properties. For those tenants, options are limited, but we suggest a tenant could: -
- If a qualifying tenant, exercise the right to extend the lease to add 90 years to the existing lease term with ground rent automatically reducing to a peppercorn. A premium will be payable, and this is based on a formula set out in the Leasehold Reform Housing and Urban Development Act 1993
- Negotiate a Deed of Variation with the landlord to reduce the ground rent to a peppercorn. A premium will no doubt be required by way of consideration if the landlord is minded to agree – it is worth noting, he is not obliged to do so
At Clifton Ingram our solicitors can advise you on all aspects of buying a leasehold property. We are a proactive and down-to-earth team of highly experienced solicitors, bringing a high quality and professional service to your local area. We regularly advise clients in Wokingham, Reading and Farnham and across all of Berkshire, Surrey and Hampshire.