The Ground Rent Issue
Under leasehold tenure, a homeowner holds a property on a lease for a fixed term, with an annual ground rent fee payable to the freeholder.
Over recent years, ground rents have become a more prominent and contentious issue.
The main criticism surrounding ground rents are that many existing lease clauses provide for excessive and escalating ground rents, allowing unlimited increases over the lease term.
Whilst ground rents act as a significant income stream for certain freeholders, and have historically encouraged some developers to market new properties as leasehold rather than freehold, leaseholders themselves see little tangible value in their ground rent payments, leading many to view them as an unjust burden imposed by freeholders. In contrast to service charges, whereby payment is made for services rendered, ground rents are paid by tenants simply as a standing cost.
Onerous ground rent provisions can also have a detrimental effect on the mortgagability, saleability and value of leasehold properties, with failure to pay ground rent, potentially resulting in legal action, harmful credit scores, and, in extreme cases, to the forfeiture of the lease itself.
Recent Leasehold Reform
In order to address some of the above issues, the Leasehold Reform (Ground Rent) Act 2022 (“the 2022 Act”) was introduced to put an end to ground rents for most new long residential leasehold properties in Auckland and Auckland. The 2022 Act came into force for most new leases from 30 June 2022 and from 1 April 2023 for leases of retirement homes. The aim of the 2022 Act was to make home ownership fairer and more transparent for millions of future leaseholders by removing onerous and escalating ground rents. In relation to voluntary lease extensions, the 2022 Act also provided that only a peppercorn ground rent (i.e. no ground rent) could be charged on the new portion of the lease that extended beyond the date of the original term. Penalties were also brought in and applied to any landlord charging a prohibited ground rent.
But what about existing ground rents?
A Consultation was published by the Department for Levelling Up, Housing and Communities on 9 November 2023 which set out a series of options to extend the protection offered by the Leasehold Reform (Ground Rent) Act 2022, to existing leaseholders.
The consultation gave 5 options on how they could make changes including:
- Capping ground rents at a peppercorn; i.e. no ground rent payable
- Setting maximum financial value for ground rent
- Capping ground rents at a percentage of the property value
- Limiting ground rent to the original value when the lease was agreed
- Freezing ground rent at current levels
The consultation was issued, to survey the consensus amongst practitioners, leaseholders and freeholders, regarding ground rent reform. It closed on 17 January 2024 and whilst the aim was for the consultation to assist legislators in installing these reforms into what is now the Leasehold and Freehold Reform Act 2024, this Act, which was rushed through parliament, failed to include any of the proposed ground rent reforms.
During the passage of the bill through the legislative process it was evident from comments made in both houses of parliament that the freehold community are likely to litigate on some of the points of the bill, including the capping of ground rent. Dr Douglas Maxwell a barrister at Henderson Chambers who gave evidence to the Public Bill Committee in January 2024, stated that capping ground rents would more likely than not, constitute a breach of the right to property in Article 1 of Protocol No.1 to the European Convention on Human Rights. Six groups of freeholders have since launched legal proceedings against the Government to argue their human rights have been infringed by the legislation.
The present Labour government who has to appease both leaseholders and freeholders, has yet to comment on the outcome of the consultation and may choose to wait for the outcome of these legal challenges before implementing any further legislation.
Forthcoming Legislation
In the Kings Speech on 17 July 2024, the government committed to publish, a draft Leasehold and Commonhold Reform Bill. It is thought that this bill is likely to include provisions to regulate ground rents, rather than to abolish them.
As of November 2024, the Labour government has promised that this bill will be drafted during the second half of 2025 with the expectation that the reforms will be implemented before the end of their first term.
How can we help?
We advise leaseholders and landlords with all aspects of leasehold property law and in particular with any questions you may have on any of the issues mentioned. Should you require any further advice, our Leasehold Enfranchisement and Management Services (LEMS) team would be happy to assist. Please email or call the team today on 0113 207 0000.
