Proposed leasehold reforms and its impact on developers
On 12 May 2021, the UK Government presented the Leasehold Reform (Ground Rent) Bill ('the Bill') before the House of Lords for examination. The Bill, which is currently going through the House of Lords, contains provisions that will reform the controversial ground rent system in England and Wales.
This article highlights the proposed changes that could impact on residential developers.
What does the Bill mean for residential developers?
The Bill restricts ground rents on all newly built flats and houses to one peppercorn per year, effectively setting ground rents on leasehold properties to zero. Subject to some exceptions set out below, these changes will largely apply to leases of dwellings granted for more than 21 years.
The following leases are excepted from the ground rent restrictions:
- Community-led leases: so that the housing sector can continue to levy ground rent in order to promote community activities;
- Home finance plan leases: such as those granted under a home reversion plan or a rent to buy arrangement; and
- Business leases: any lease that expressly permits the demised premises to be used for business purposes.
Any leases granted before the legislation comes into force, will not be affected. So, the legislation will not have retrospective effect.
The Bill does not exclude leases of retirement properties.
When do these changes come into effect?
It is difficult to predict exactly when these changes will come into effect as the Bill is still going through the legislative process. These changes are unlikely to be effective immediately as it will take some time for the Bill to go through the parliamentary process.
The Bill however states that the ban on ground rent in all leases of retirement homes cannot come into force before 1 April 2023.
How will the new ground rent restrictions be enforced?
The Bill proposes to give powers to trading standards authorities to enforce the Bill. A breach of the ground rent restrictions will be a civil offence attracting fines of up to £5,000 against any landlord who demands payment of a prohibited ground rent. It also makes provision for leaseholders to recover unlawfully charged ground rents through the First-tier Tribunal.
Although the Bill is being hailed as the biggest English property law reform in decades, what impact, if any, it could have on residential developers is yet to be seen.
Many residential developers have already begun moving away from charging ground rents and are selling leasehold properties with a nominal or zero ground rent. Moreover, residential developers are now precluded from selling leasehold properties with ground rents under the new Help to Buy Equity Loan 2021-2023 Programme which came into effect earlier this year.
Thus, for many residential developers, the Bill appears to consolidate practices that are already afoot rather than introduce radical changes.