In the wake of the much-anticipated leasehold reform proposals introduced in the King’s Speech, the Government published its consultation seeking views on capping ground rents in long existing residential leases in England and Wales; subject to which the Government will proceed to introduce some form of cap on existing ground rents through the Leasehold and Freehold Bill. The consultation period is open for six weeks (closing on 21 December 2023).
The Leasehold Reform (Ground Rent) Act 2022 was brought into force, which has resulted in capping the ground rent to zero in most new residential long leases of a single house or a flat from 30 June 2022. On renewal of a lease on a voluntary basis, the ground rent may not exceed the current rent payable or be imposed after the end of what would have been the original lease term. The consultation on banning existing ground rents seeks to address the two-tier system that is developing in leasehold property between existing leases with uncapped ground rent and new leases with zero rent.
As with the Leasehold Reform (Ground Rent) Act 2022, the Government intend to implement an enforcement regime around any ground rent cap, i.e. through fines administered by the local authority.
Within the Government’s consultation portal, the Government has outlined its proposed options for capping ground rents in existing leases. The five options proposed by the Government are:
- Option 1 – Capping ground rent at a peppercorn (zero ground rent);
- Option 2 – Setting a maximum financial value for ground rent (the maximum value is to be determined but is proposed at £250 per annum);
- Option 3 – Capping ground rents at a percentage of the property value (the current proposal is 0.1% of the property value);
- Option 4 – Limiting ground rent to the original amount it was when the lease was agreed; or
- Option 5 – Freezing ground rent at current levels.
The Government are also consulting on any transitional period before implementation of any proposals and it is impossible to predict which of the above options might be opted for by the Government to take to Parliament, but there could be fairly extensive scope for debate in Parliament around these measures. The most favourable of the options from a freeholder’s perspective is to cap ground rents at a fraction of market value.
Subject to the views of consultees, the Government intend to implement any cap on ground rents by overriding lease terms through legislation rather than varying clauses and intend for any costs incurred by the freeholder in implementing the changes to be borne by them.
The Effect of the Proposals
Regardless of which option the Government deems the most appropriate following its consultation, the result will be that freeholders will see both a reduction in ground rent income and also an impact on the capital value of their assets. This may have a significant adverse financial impact on the value of portfolios held by professional and institutional landlords and investors who rely on ground rent as an income stream.
If the intention is to limit the level of ground rent that can be charged, this will benefit leaseholders on two fronts.
- Lessees will have a lower medium to long term expenditure on ground rent in the lifetime of the lease, and those with excessive or doubling ground rents will have an automatic solution to their problem.
- If a cap is introduced and this also follows through into the valuation mechanism, then it will reduce the amount to be paid on enfranchisement, as the ground rent must be ‘bought out’when buying the freehold or extending the lease and freeholders would receive no compensation for that element.
How to Respond
Freeholders, investors, leaseholders and other stakeholders in the industry will no doubt want to have their say on this consultation, given its significance and potentially large ramifications on existing arrangements. Responses to the consultation can be made prior to 21 December 2023 by completing the Citizen Space online survey or by sending responses to the consultation via e-mail to: Groundrents.Consultation@levellingup.gov.uk.
Contact our Landlord & Tenant team
If you have a query concerning how you may be affected by the Government consultation on ground rent for existing residential long leases, then please contact our expert Landlord & Tenant team by emailing email@example.com.
The above is accurate as at 16 November 2023. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.