First step on the road to Leasehold Reform and its impact on Enfranchisement

7 June, 2021

The Leasehold Reform (Ground Rent) Bill is currently making its way through Parliament, with the next step being the committee stage scheduled for 9 June 2021.  This is the first Bill in the Government’s proposed comprehensive reform of leasehold and is intended to reduce ground rents on new residential long leases to one peppercorn per year.

In October 2018 the Ministry of Housing, Communities and Local Government (MHCLG) originally opened a consultation on proposals including a restriction on ground rents to a maximum of £10 per year.  This proposal was reduced to a maximum ground rent of a peppercorn in the MHCLG’s response to that consultation in June 2019.  The Bill takes this proposal forward and restricts ground rents on newly established long residential leaseholds to one peppercorn per year.

Perhaps with an eye on unscrupulous landlords, the Bill also prohibits the charging of administration charges in relation to the restricted peppercorn rents.

Any breach of the restrictions on ground rent will be a civil offence subject to a financial penalty of between £500 and £5,000.  Under the provisions of the Bill, leaseholders will be able to apply to the First Tier Tribunal for the recovery of unlawfully charged ground rents.

Impact on statutory lease extension claims

This proposed change in ground rents will not have any impact on statutory lease extensions.  Both lease extensions of houses granted pursuant to the Leasehold Reform Act 1967 and lease extensions of flats granted pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 are expressly excluded from the new restriction.

Impact on collective enfranchisement claims

As a collective enfranchisement claim concerns the acquisition of the freehold interest in the relevant building or part of a building, the Bill will not impact on the claim itself.  However, the new provisions will apply to leases created by a relevant variation of an existing lease that results in a deemed surrender and re-grant (ie change in demise or term).  This is important to note as often a motivating factor for acquiring the freehold is to be able to grant the participating tenants extended lease terms of 999 years.  Such a grant would be caught by the restriction on ground rents and therefore the new leases would need to be granted at a peppercorn ground rent.  This may be of concern to prospective claimants as it is not unusual for the participating tenants to intend for the nominee purchaser (usually a company owned by the participating tenants) to receive ground rent.  This is to ensure there are sufficient funds for the day-to-day management of the building and to avoid the freehold company from becoming insolvent due to the non-payment of service charge or pursuit of tenants that have failed to pay service charge.

This is an important first step by the Government in their proposed reform of leasehold.  For further information on the proposed reforms to this sector, please see our e-book on the future of leasehold.