Ground Rents – The Cost of Living on Their Land
Navigating current and future reforms surrounding onerous ground rent.
Leasehold reforms, a prominent topic currently circulating the conveyancing world, even the King is talking about it! Legislative reforms relating to leasehold property is one of many subjects raised in his recent speech. What is especially interesting within these reforms is the continued action proposed on exploitative ground rents. Reformers are hopeful that the price of ground rents will drop from sky-high rates, down to the nominal value of a peppercorn on qualifying leaseholds. This article explores the recent reforms, focusing on how the workflow of conveyancers may change, and otherwise remain the same.
What is Ground Rent?
To kick off, a ground rent in a lease is a periodic sum payable by the tenant to the landlord. Until recently, the ground rent could be any amount within the lease agreement granted by the parties. In practice, a tenant negotiating a long term residential lease would have little bargaining power against the landlord throughout the leasehold transaction, who is often looking to maximise their investment and keep leases (within the same development) uniform.
Given this context, it is easy to gather how we have reached this point of needed reform, and clients will be eager to understand this detail at the start of the leasehold transaction process. By removing the incentive for some landlords to exploit tenants, buyers can achieve greater autonomy over their properties, a considerable step towards creating a more equitable housing market.
The Reforms: Where Are We Now?
Looking back to June 2022, the Leasehold Reform (Ground Rent) Act 2022 (the Act) came into force. A notable inclusion stated that for a select range of new regulated leases granted after the 30th of June 2022, the ground rent cannot be anything more than a peppercorn.
Historically, a peppercorn ground rent referred to something with a nominal value. Therefore with this reform, the Act goes so far as to define a peppercorn, setting the rent to effectively be zero. The Act defines a regulated lease to which the peppercorn ground rent limit will apply, which has now been extended to new long residential retirement leases agreed after the 1st of April 2023.
The Reforms: Where Do We Go From Here?
There are, however, exceptions that fall outside of these regulated leases, meaning clients and legal teams must remain diligent in uncovering the risks surrounding costly ground rents in leasehold transactions that do not qualify under the new ‘peppercorn’ rule.
The Act does not apply to:
- Existing leases granted before 30th of June 2022 or 1st of April 2023 for retirement leaseholds.
- Leases granted where contracts were exchanged before the 30th of June 2022.
- Other exceptions relating to business leases, leases for community led housing and certain financial products.
- Statutory lease extensions, as opposed to lease extensions through the informal, non-statutory route.
The Issues that Remain
Moving forward with the above exceptions in mind, traps for conveyancers and clients relating to onerous ground rents have already been well documented, and in particular, diligence is needed:
- Where the ground rent is, or could increase to more than £250 (£1000 in Greater London) with the issues that arise under the Housing Act 1988.
- Where the ground rent becomes excessively high, for example where the rent doubles frequently. Calculations show a ground rent of £250 doubling every 10 years reaches an eye watering £1,000,000 plus at year 120, as against an ground rent of around £9,000 at year 120 based on an increase at an average RPI of 3%.
Concluding Thoughts
Optimistically, this rent cap is one of the first steps to reform and is something for conveyancing lawyers to check when approving the grant of a new regulated leasehold. Although, high and escalating ground rents will remain a prevalent topic for the residential conveyancing community for the foreseeable future.
Lawyers will need to continue to keep their buyer clients properly advised of any issues regarding the ground rent early on in the leasehold transaction, and frequently review the lenders’ requirements under section 5.14.9 of the UK Finance Handbook or Building Societies Association equivalent.
This diligence is something Orbital Witness prioritises for our current customers. Whereby, our tool quickly highlights where in the lease report ground rent may be an issue. One of the many useful features that can save time for the busy conveyancing lawyer and improve the purchasing process for clients.
Written by Elizabeth Stokes – Conveyancer at Orbital Witness
This article was submitted to be published by Orbital Witness as part of their advertising agreement with Today’s Conveyancer. The views expressed in this article are those of the submitter and not those of Today’s Conveyancer.
