“Ground zero” for ground rents

The long awaited Leasehold Reform (Ground Rent) Bill 2021-2022 is wending its way through Parliament and has now reached the report stage, which gives MPs an opportunity to consider further amendments.

The legislation, once in force, will restrict ground rents on new long leases of flats and houses (with some exceptions) to a token rent of one peppercorn (essentially nil) per year. Rents in existing leases will however remain unchanged.

A peppercorn rent is a nominal amount of rent paid in order to legalise a rental contract.  The phrase dates from the late 16th/early 17th century when a single peppercorn was first used in such transactions, pepper being quite highly valued in those days.  The significance of the original expression does not imply that peppercorns are intrinsically worthless, rather that one peppercorn is of nominal value.  By the late 18th century, peppercorn had come to mean anything of insignificant value, which is why it is seen in leases today.

The Bill has been widely welcomed as a first positive step in leasehold reform, with the intention being to make leasehold ownership fairer and more affordable for leaseholders.

Several issues and concerns were however raised during the Bill’s passage through the House of Lords, who were in particular concerned about the following:

• the Bill only applies to new leases and will not assist existing leaseholders faced with high and escalating ground rents;
• unscrupulous landlords may pressurise leaseholders to agree voluntary lease extensions in order to continue existing ground rent arrangements;
• there is no firm timetable for the more substantive second part of the leasehold reform legislation to make acquiring your freehold or an extended lease easier and cheaper.

Existing leaseholders

The legislation will not apply retrospectively, with the effect of creating a two-tier market.  One for existing leases which could become more difficult to sell and the other for new leases which will be much more attractive in the market.

High and escalating ground rents

The new round of leasehold reforms began in July 2017 with the Government’s consultation paper entitled Tackling Unfair Practices in the Leasehold Market, which observed a trend in significant ground rent increases in new leases, higher ground rents at the outset and shorter review periods.  The result was found to be “onerous and unsustainable ground rents” causing difficulty selling and remortgaging.

The Housing, Communities and Local Government Select Committee concluded that

“Any ground rent is onerous if it becomes disproportionate to the value of a home, such that it materially affects the leaseholder’s ability to sell their property or obtain a mortgage…”

“… it is increasingly clear that a ground rent in excess of 0.1% of the value of a property or £250 – including rents likely to reach this level in future due to doubling, or other, ground rent review mechanisms – is beginning to affect the saleability and mortgageability of leasehold properties.”

Miss-selling and unfair terms

The Government’s consultation paper triggered an investigation by the Competition and Markets Authority (CMA) in May 2019 to the extent of miss-selling and onerous lease terms, including whether the latter might constitute unfair contract terms.

The CMA said that they had found “worrying evidence that people who buy leasehold property are being misled and taken advantage of”. They announced that they were opening enforcement cases against four developers: Countryside Properties, Taylor Wimpey, Barratt Developments and Persimmon Homes.

Taylor Wimpey apologised for doubling ground rents and set aside £130 million for a Ground Rent Review Assistance Scheme.  This doesn’t however help leaseholders on developments sold to third party investors and the CMA has secured an undertaking from the investment company, Aviva, to remove  doubling ground rent provisions and ground rents based on increases in the Retail Prices Index from their leases and to revert to the original ground rents.  Aviva has also undertaken to refund home owners affected by doubling ground rent clauses.  Countryside Properties subsequently gave formal commitments in similar terms to Aviva.

The CMA has urged other developers to follow suit.  Their investigation into Barratt and Taylor Wimpey is ongoing.

Landlord obligations

The House of Lords expressed concern that the legislation would encourage landlords to pressurise tenants into agreeing voluntary lease extensions in order to preserve existing rent arrangements, instead of making statutory claims (which automatically reduce the rent reduction to a peppercorn).

It was however identified that the proposed wider reforms include a requirement for court approval to any voluntary extension, with a view to ensuring that the terms of voluntary agreements are consistent with statute.

Of greater concern to the House of Lords was the proposal that landlords should be under an obligation to inform leaseholders of the impending legislation before entering into voluntary agreements. That obligation would be effective upon Royal Assent. This raises the spectre of otherwise scrupulous landlords being unfairly sanctioned for an unwitting breach.

Wider reform

The Government has committed to future legislation in a wide programme of reform to assist existing leaseholders and to make it easier and cheaper to acquire the freehold or an extended lease.

The reforms include the following:

• The right for house and flat owners to extend their leases to 990 years at zero ground rent and reduced costs;
• Abolition of 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;
• Prescribed rates for other elements of the premium calculation;
• A Commonhold Council, being a partnership of leasehold groups, industry and government, that will prepare home owners and the market for the widespread take up of commonhold.

The detail and timing of the wider reforms are uncertain.  The Department for Levelling Up, Housing and Communities has now launched a consultation seeking views on a number of the proposed reforms, with a deadline of 22 February 2022 for responses.  What is clear is that the legislation will come in two parts, first with the enactment of the Leasehold Reform (Ground Rent) Bill to set future ground rents to zero in new leases, followed by reforms to the enfranchisement legislation.

For further information regarding this topic, please contact Katherine Simpson or any member of the Property team.

 

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