The Leasehold Reform (Ground Rent) Bill received Royal Assent on 8 February and is due to come into force in stages.

The Act, which forms a key part of the government's agenda for leasehold reform, effectively abolishes ground rents under new long residential leases (ie leases with a term of more than 21 years) that are granted for a premium.  

Annual ground rents on these new long leases will now be restricted to a token peppercorn, meaning that any new ground rents will have no financial value. Nor will landlords be able to apply "administration" charges in relation to the peppercorn rent, with a view to anti-avoidance. 

What will the staged approach look like?

The Secretary of State is to announce a date when the main provisions of the Act will come into force. It's expected that they will fully commence within six months of 8 February. The Act will not have retrospective effect, however, although any existing leases which are varied (resulting in a deemed surrender and re-grant) after the Act has come into force will be captured, meaning the ground rent will be removed from the date of the variation. For any lease extension being negotiated informally, ground rent cannot be increased above the amount charged under the existing lease. 

Is my lease excepted from the Act?

Certain types of leases are excepted such as business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases. Nor will the Act   apply to leases granted under contracts entered into prior to the commencement of the Act. unless in accordance with an option or right of first refusal. 

Special rules will apply to shared ownership leases and leases that replace pre-commencement leases (eg voluntary lease extensions under Part 1, Leasehold Reform Act 1967 or Chapter 2, Part 1, the Leasehold Reform Housing and Urban Development Act 1992). For retirement homes, the provisions will come into force no earlier than April 2023. 

What are the ramifications for breach?

Breaches of the Act attract financial penalties of between £500 and £30,000 and are to be enforced by Trading Standards. The penalty will be per qualifying long-lease. 

Any ground rent collected in breach of the provisions of the Act must be returned within 28 days of the demand for payment. 

What does the Act mean for developers and landlords?

As a landlord or developer, the time scale for implementation leaves little scope for putting in place transitional arrangements although it's fair to say that many house builders have already adapted their practices in anticipation of the Act, and are no longer imposing ground rents. For those who have been continuing to charge rents under current schemes, there is the prospect of a potentially messy scenario with some properties on a development sold on market ground rents and others not.

Consideration should be given to any plans to vary a current long lease as under the Act this may constitute a surrender and re-grant and could in advertently result in the Act applying. 

Tenants looking to buy leasehold property will still need to pay attention to the ground provisions in existing leases.

Further comments

The Act aims to address issues that tenants have been facing with increasingly unaffordable ground rents which has caused widespread problems for tenants seeking to sell, re-mortgage, buy their freehold or extend their lease. However, without retrospective effect, landlords under existing long leases will still be able to charge ground rent and administrative fees at onerous rates, meaning that the majority of tenants will remain in the same position even once the legislation is fully in force.