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Covering new ground - a first look at the proposed Ground Rent Bill

The new Ground Rent Bill shows a clear intention from the government that ground rents have no place in the future of property ownership. We look at the proposals.

The Government announced the long awaited ground rent proposals in January 2021, aiming to tackle spiralling ground rents imposed by landlords on residential leasehold properties.

On 12 May 2021 the Ground Rent Bill (officially the Leasehold Reform (Ground Rent) Bill) was presented subject to parliamentary debate.

Leases subject to Reform

The Ground Rent Bill will apply to long leases of a residential dwelling, for a term exceeding 21 years.

There are some exceptions, which include community housing leases, where the landlord is a community land trust or a co-operative society or where lease structures are used for funding purposes (i.e., Sharia and other security arrangements).

Rent Reform

The Ground Rent Bill will standardise all ground rents to an annual rent of one peppercorn, overriding any ground rent provision in the lease.

There are some more complex rules for shared ownership leases, differentiating between the landlord's share, which can be any rent, and the tenant's share, which will be a peppercorn rent.

The Ground Rent Bill does not include any definition of ground rent. This has been criticised in the parliamentary debate, particularly in respect of a landlord's interest where no premium is paid for the lease and a market rent collected. The Ground Rent Bill may have the effect of reducing the market rent to £0.

No Retrospective Application

Critically, the Ground Rent Bill will only apply to leases that come into force after the date of the Bill.

This has been a major theme in the parliamentary debate, with speakers noting that the Ground Rent Bill will fail to address the situation of existing leaseholders with spiralling ground rent costs. There were concerns that this could create a two-tier market where new-build properties with ground rent protection would be more attractive to purchasers, rendering existing leasehold properties with enforceable ground rent provisions unsellable.

The provisions will apply to replacement leases. However, any such lease will need to be reviewed carefully against the Ground Rent Bill to establish what point the new lease becomes a regulated lease, particularly if there is some overlap in the terms of the new and the expiring lease. However, as expected, the drafting appears to favour the tenant's position.

Enforcement

A landlord cannot require a tenant (or a guarantor) to make a payment of a prohibited rent. If they do, they must refund it to the tenant within 28 days.

The local weights and measures authority or district council can enforce the regulations on a landlord. The financial penalty will be no less than £500 and no more than £5,000, with interest payable.

Only one penalty can be enforced at a time, but after the penalty has been issued if a further breach has been made, a penalty can be imposed for any further breach. The landlord may also be ordered to pay the tenant any amount that has not already been refunded.

Tenant's Options

A tenant can apply for a Recovery Order to the First-tier Tribunal, giving the landlord 28 days to refund the prohibited rent (potentially with interest payable) or for a declaration as to whether a rent payment was improper.

The 'landlord' in the application can be the landlord at the time the payment was made, or when the application was made, or the person to whom the payment was made if they were acting on behalf of the landlord under the lease.

The options available to the tenant are separate from the enforcement action, so if a tenant succeeds in recovering the rent it doesn't necessarily mean the landlord will receive a fine.

Administration Charges

The Ground Rent Bill states that administration charges will also be barred. There is no definition of administration charges so it is unclear what this may mean. The intention behind this is clearly to stop landlords exploiting a loophole but there are concerns that valid service charges, essential for the management of an estate, could be caught by this.

What Next?

The Second Reading took place on 24 May 2021 in the House of Lords and the Committee Stage has been scheduled for 9 June 2021. A report and 3rd reading will take place in the Lords before the Ground Rent Bill goes to the House of Commons.

Despite issues to be worked out, the Ground Rent Bill is welcome news for tenants. The key controversy is whether the Bill should apply retrospectively. We will keep you updated.

For more information on the article above please contact Lola Skuse.

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