Owners of leasehold flats have long been used to paying a ground rent to their landlord. In law, the payment of rent is one of the features suggesting that a legal lease has been created. Flat owners will generally have a long lease, often 125 or 999 years long and ground rents have been set at fairly nominal levels, perhaps only £50 per year.
However, in recent years, developers have increased ground rents payable on long leases of flats primarily as a way of getting more value out of the investment. This has led to a number of problems for those selling and buying flats. If the annual ground rent of a property exceeds £250 (or £1,000 in London) the lease could be liable to be terminated by the landlord, if the ground rent is unpaid. Many long leases also include a mechanism for a review and increase of the ground rent, some of which can result in an unacceptably high level of ground rent. This has caused concern and difficulty for a number of years and following a review by the Competition and Markets Authority, some developers have already indicated that they do not propose charging ground rent on new properties that they build.
In addition to the above problem relating to flats, many developers unnecessarily sold houses on a long lease basis (as opposed to freehold) which has also resulted in expense and difficulty for those homeowners.
The government has recognised that these ground rent issues have caused problems in the housing market and the Leasehold Reform (Ground Rent) Act 2022 is now on the statute books although will not come into force until around the middle of 2022. Once the Act commences, if any ground rent is demanded as part of a new residential long lease, it cannot be for more than one 'peppercorn' per year meaning that future leaseholders will not be faced with financial demands for ground rent. The Act also bans freeholders from charging administration fees for collecting a peppercorn rent. If a freeholder charges a prohibited ground rent, the freeholder will be subject to a civil penalty regime which includes fines of up to £30,000.
The Act restricts ground rents on new long leases of houses and flats and effectively outlaws the charging of ground rents. However, ground rents will continue to be an issue for people purchasing flats and houses that have already been constructed as ground rents have not been abolished completely. The Act puts an end to ground rents for new, qualifying long residential leasehold properties in England and Wales but the Act is not retrospective.
Accordingly, anyone purchasing an existing flat (or house on a long lease) should ensure that they obtain specialist advice. Developers are taking a piecemeal approach to abolition or reduction of ground rent on existing long leases and other freeholders may have to take steps when the Competition and Markets Authority concludes its investigations. A property with a high ground rent or unacceptable mechanism for review could lead to it being unsaleable or impossible to use as security for a mortgage.
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