When is a peppercorn not a peppercorn?

The Leasehold Reform (Ground Rent) Act 2022 (“2022 Act”) will come into force on 30 June 2022 and is introducing changes that will affect property transactions involving leasehold dwellings.

What changes is the 2022 Act bringing, exactly? And what do our clients and contacts need to consider when these changes come into effect?

The Key Points:

• If a ground rent is demanded as part of a regulated new residential long lease, it cannot be for more than one peppercorn per year.
• Landlords will be banned from charging administration fees for collecting this; closing a loophole whereby a monetary charge could be recouped via another route.
• A landlord will be in breach of the 2022 Act if it (or those acting on its behalf) requests payment of a prohibited rent (i.e. a rent above a peppercorn) and/or receives a prohibited rent and/or fails to refund it to the tenant within 28 days of receipt and may be fined up to £30,000.00.
• The 2022 Act does not have retrospective effect – therefore will not apply to leases granted before 30 June 2022.

Which leases does it affect?

• The 2022 Act applies to “Regulated Leases”, which means a lease which:
  • Is a long lease of a single dwelling (i.e. more than 21 years);
  • Is granted for a premium;
  • Is granted after the relevant commencement day (i.e. 30 June 2022); and
  • Is not an “Excepted Lease”.

• Excepted Leases are as follows:
  • Certain business leases;
  • Statutory lease extensions of a house or flat;
  • Community housing leases; and
  • Home finance plan leases.
• The 2022 Act is wide enough that where a variation to a lease may constitute a deemed surrender and re-grant of the lease (i.e. varying the extent of land demised or extending the term of the lease) the new lease may become a Regulated Lease (with no requirement for a premium to have been paid).

What about shared ownership leases?

• Section 5 of the 2022 Act sets out the provisions for when a Regulated Lease is a shared ownership lease.
• In respect of the tenant’s share (i.e. the initial share purchased plus any additional share(s) which have been acquired via staircasing) the permitted rent is a peppercorn rent (as per a normal Regulated Lease).
• In respect of the landlord’s share (i.e. the percentage or share not owned by the tenant) the permitted rent can be any rent.
• If the lease does not reserve separate rents in respect of the tenant’s share and the landlord’s share, any rent reserved is to be treated as relating to the landlord’s share.

Have they thought about non-statutory lease extensions?

• The 2022 Act sets out the regulations for a “Replacement Lease”, being one that is:
  • A new lease of premises which consists of some or all of the premises demised by the pre-commencement lease;
  • Having a term start before the end of the term of the pre-commencement lease; and
  • Is a Regulated Lease (i.e. a premium is paid).

• Where this is the case, the rent reserved by the existing lease can be replicated in the Replacement Lease; provided that when term of the existing lease would have expired, the rent provisions fall away to become a peppercorn.

What does this all mean?

• For homeowners – the 2022 Act will undoubtedly ‘shake up’ the leasehold property market and where, historically, expensive ground rents have often caused problems for homeowners, the 2022 Act will put an end to this. It will be crucial to ensure that your lawyer checks the ground rent provisions carefully and advises accordingly.
• For landlords – it will be twofold:
  • They will need to be careful to avoid inadvertently terminating their rental income steam by agreeing to a variation of a lease that may constitute a deemed surrender and re-grant of the lease; and
  • They will need to be careful if, in the event of a deemed surrender and re-grant of the lease, they do not subsequently fall foul of the new regulations.
• For developers – if developing properties which are intended to be sold as individual leaseholds, it will be paramount to ensure that the residential long leases are compliant with the 2022 Act (i.e. if it demands a ground rent, it must not be for any more than a peppercorn per year and that no admin fees are charged for collecting this).

To read the full 2022 Act, click here.