Reduction of rent for long residential leases

Last year the Government announced that it would introduce a number of leasehold reforms to make homeownership cheaper, fairer, more secure and more transparent.

The proposed reforms included:

• Introducing a peppercorn (zero financial value) ground rent for new leases;
• Giving leaseholders the right to extend their lease by 990 years; and
• Abolition of ‘marriage value’ when valuing the amount payable by leaseholders when extending their lease.

The Leasehold Reform (Ground Rent) Act 2022 (the Act) came into force on 30 June 2022 and is the first part of a programme of legislation to give effect to the leasehold reform proposals.

What does the Act mean for leaseholders?

The Act was introduced to protect leaseholders from onerous ground rents and escalating ground rents. As the Act bans the charging of ground rent on new long leases for residential properties in England and Wales, it is good news for leaseholders.

Existing leaseholders whose leases were granted before 30 June 2022, will not see an immediate change to their rent. There is likely to be future legislation which will extend the ground rent restrictions to existing leaseholders. In the meantime, leaseholders can seek to extend the term of their lease and in doing so could benefit from the provisions of the Act as the rent payable for any period beyond the existing term of the lease would be reduced to a peppercorn (nil).

Existing long leaseholders already have the ability to extend their leases either by agreeing the terms with the landlord or by using the statutory procedure.  For flats, this procedure is governed by the Leasehold Reform, Housing and Urban Development Act 1933 (LRHUDA 1993). By following the statutory procedure, eligible leaseholders can obtain an additional 90 years onto their existing lease term and reduce the rent to a peppercorn.

Not all leaseholders will benefit from the Act. Leases for certain retirement properties are not currently included under the Act’s provisions, although the Act will apply to these leases from April 2023. The following leases are also excluded from the Act’s provisions and the new ground rent restrictions:

• Business leases;
• Statutory lease extensions of houses and flats;
• Voluntary or non-statutory lease extensions of houses and flats, which can retain the existing level of ground rent for the remainder of the original lease period;
• Shared ownership leases, where rent is payable on the landlord’s owned share and the peppercorn rent limit applies to the leaseholder’s owned share;
• Community housing leases; and
• Home finance plan leases.

What does the Act mean for landlords?

A landlord charging ground rent in contravention of the Act, can be fined up to £30,000, so it certainly something to avoid overlooking.

Whilst the provisions of the Act may seem unfair to landlords, in practice that may not be the case. For landlords granting new long leases, they may mitigate their future loss of rental income by charging a higher premium when granting the lease.

For landlords with existing leaseholders, whilst they may see a reduction in rental income as a result of the Act being introduced, as leaseholders already had the ability to reduce their rent under the LRHUDA 1993 there is in reality very little change following the introduction of the Act.

What is likely to be much more concerning for landlords are the other leasehold reform proposals. The ‘marriage value’ is currently taken into account when valuing the premium payable by leaseholders when they extend their leases where there is less than 80 years left on the term. The marriage value usually increases the premium payable substantially and so landlords are likely to suffer a loss when leaseholders extend their leases. The proposal to allow leaseholders to extend the lease term by 990 years is also going to reduce the value of the freehold of the property held by the landlord.

If you would like any further information in relation to lease extensions, please do contact FSP’s Property Litigation team.