Housebuilder Tip of the month: Leasehold Reform (Ground Rent) Act 2022 – What does this change mean for housebuilders?

Published 26 April 2022

Ground rent and unfair leasehold terms have been a hot topic for the media for a significant amount of time now with changes to legislation long anticipated, especially given the Help to Buy changes which came in to force last year. On the 8^th February the Leasehold Reform (Ground Rent) Act 2022 (“the Act”) received Royal Assent with a supporting statement confirming the Act would come in to force within 6 months, in real terms no later than the 8^th August 2022. Over the past few weeks it has been rumoured that the Act will come in to force sooner than expected on the 30^th June 2022. The looming  date fast tracks the need for reviews of any sites where ground rent is currently demanded and also a review of historic sites where previous customers may be requiring an extension of their leases. 

The Act will only allow a ground rent of a peppercorn to be demanded as part of a new residential long lease and will ban freeholders from charging administration fees for collecting a peppercorn rent. The peppercorn rent will also apply in situations where you are significantly varying an existing lease, for example where you are extending the lease term. In this situation the variation will be treated as if the lease has been surrendered and re-granted meaning the Act will apply and the ground rent provisions will need to be varied and reduced to a peppercorn. Given recent changes in lender guidance we have seen an increased demand for deeds of variations and lease extensions for existing leases, we anticipate requests for variations to ground rent will follow suit.

There are certain exceptions to the Act and certain leases will not be subject to the ground rent restrictions introduced by the Act. Business leases, statutory lease extensions, community housing leases and home finance plan leases will be exempt. There is also separate provision for retirement leases and whilst the Act will eventually apply there is a longer transition period for retirement leases with provisions not coming into force prior to the 1^st April 2023.

Practically, there are a few issues to be discussed especially with sites where units may have already exchanged and completed. As of the 30^th June 2022 all leases must only be granted with a peppercorn ground rent, whilst there are exceptions in place for contracts that have exchanged, we would anticipate a demand from purchasers’ solicitors to request a review of the lease and adjust the ground rent to a peppercorn prior to completion. In light of this it may be advisable to consider adjusting the ground rents on current sites prior to the commencement of the Act as this may also achieve exchanges quicker on pending reservations. It is also important to review strategies for disposing of the remainder of the freehold once the final sale completes given there will no longer be any financial value to this, for example transferring the remainder of the freehold to a residents management company.

Any breach of the regulations imposed by the Act will constitute a civil offence carrying a financial penalty between £500.00 and £30,000.00.

We are anticipating further leasehold reform and lender changes as a result of the Act and we urge you to watch this space!