The Leasehold Reform (Ground Rent) Act 2022 will come into force on the 30th June 2022, except for retirement properties where it will not come into force before 1 April 2023. In this article we look at how the new legislation affects residential property landlords and tenants when looking to agree an informal lease extension.

What does the Act say?

The Act will restrict ground rents on new long residential leases of flats and houses to a token rent of one peppercorn (essentially nil) per year. Historically, expensive ground rent fees have often caused problems for homeowners of leasehold properties, particularly where the costs have increased exponentially year on year.

S3(1) of the Act states that landlords under a “regulated lease” cannot grant a new lease after 30th June 2022 that reserves a “Prohibited Rent”. A regulated lease is defined in the act as a long lease of a single dwelling that is granted for a premium. A prohibited rent is defined as anything more than a peppercorn per year. A ‘long lease’ is a lease granted for more than 21 years. Therefore, any new ground rent pattern that is agreed under a new lease is prohibited after the 30th June 2022.

If you are developing properties you intend to sell as individual leaseholds or you are looking to agree a lease extension, we advise that you get legal advice when creating new residential long leases to ensure they are compliant with the Act.

What happens if landlords do not comply?

Any landlord that doesn’t comply with this legislation can be looking at a fine of up to £30,000.00 so it is imperative to ensure compliance.

What if the parties want to agree an informal lease with a continuing ground rent?

Although a new ground rent pattern cannot be agreed under the new legislation, the current ground rent reserved by the existing lease can remain in place until the expiry of that lease. On a lease extension this means the tenant can continue to pay rent at the same level as their current lease but from the date the lease would of ended until the end of the new term no ground rent can be charged.

What if contracts have been exchanged before the 30th June?

As long as a contract is exchanged prior to 30th June, the parties are not bound by the provisions of the act and the lease can agree ground rent as agreed between the parties.

The Future

This legislation is the first stage in a two-part government reform. There will be further legislation which will include statutory lease extensions, as the government wishes to give house and flat owners the rights to extend their leases to 990 years at zero ground rent and reduced costs and also abolish ‘marriage value’ which is an additional element of value payable for the freehold or an extended lease where the unexpired term of the lease is 80 years or less.

How we can help

The specialist property team at THP Solicitors advise on residential lettings for both landlords and tenants. For more information please contact Frances Watts on t: 0118 920 9499 or e: frances@thpsolicitors.co.uk