The Leasehold Reform (Ground Rent) Act 2022 (the “Act”) came into force on 30 June 2022. The Act has the effect of limiting ground rent payable for most new long residential leases.

Moving forwards, leases which fall under the remit of the Act cannot demand ground rent of more than a “peppercorn” per year. A peppercorn has no financial value and, as such, no ground rent is due.

What is ground rent?

Ground rent is a sum paid by the leaseholder to the landlord. It was originally intended to reflect the value of the ground being let, although this is rarely the case in modern times. Whilst this sum rarely reflects the actual value of the ground being let, it can be hundreds, or even thousands of pounds per year.

Ground rent is not to be confused with service charge which contributes towards the maintenance of the property and any services provided by the landlord or their managing agent. Whilst service charge is often higher, unlike ground rent, you will be made aware of how your payments are being utilised to improve and maintain your property and any common areas.

What Leases are caught by the Act?

The Act applies to all regulated leases issued on or after 30 June 2022. Regulated leases include long leases (exceeding 21 years) for a single dwelling and leases granted for a premium.

The Act does not apply to:-

  • Non-regulated leases;
  • Business leases; and
  • Leases issued before 30 June 2022.

Unfortunately, one of the contentious elements of the Act is that it is does not apply retrospectively. This means that whilst it applies to new leases issued after the Act came into force, leases already in existence are still bound to pay the agreed ground rent.

However, further reviews are being considered and may well change this position.

How does the Act affect me?

Landlords can rest assured that leases which fall outside of the Act will not be affected, meaning ground rent payments should continue to be made undisturbed.

Landlords should, however, be cautious with any new leases. Charging ground rent in contravention of the Act could make you liable to a financial penalty as high as £30,000. You may also be required to return any incorrectly claimed ground rent to the leaseholder.

However, the introduction of the Act is welcome news for most leaseholders. Onerous ground rent has often been a sticking point for lenders who are hesitant to lend on properties where ground rent is “unusually high” or subject to increase. Therefore, this reform has made some progress towards making leasehold properties more attractive and affordable.

If you are currently subject to an onerous ground rent, you may be able to agree to vary your lease provided that your landlord co-operates.

How Ellisons can help?

Regardless of whether you are a landlord or a leaseholder, it is important to bear in mind the implications of the Act, particularly when entering into a new lease that is caught by the Act. Obtaining legal advice at an early stage in lease discussions will help you negotiate the best possible terms, in addition to ensuring compliance with the Act.

If you have any questions about the Act or how it impacts you and your property, please do not hesitate to contact one of our Property experts who would be happy to assist.