What will the Leasehold Reform (Ground Rent) Act 2022 change?

The Leasehold Reform (Ground Rent) Act will come into force on the 30th of June 2022. The Act will restrict ground rent to a peppercorn amount, which will essentially reduce all ground rent to a sum of zero (s4). Any breach of this Act where ground rent is charged may lead to a fine of up to £30,000 (s9). In addition to this, a local enforcement authority will likely order the recipient to repay the prohibited ground rent (s10).

The Leasehold Reform Act 2022 will not apply to business leases, community housing leases, home finance plan leases and statutory extension leases (s2). It will apply to retirement homes, but any ground rent changes for retirement homes will come into force after the 1st of April 2023. Freeholders will not be permitted to charge admin fees for the processing of the peppercorn amount (s18).

Why is the Leasehold Reform Act 2022 coming into force?

Ground rents have gained a reputation for being unreasonable fees that provide “no clear service in return”. They have been known to reach up to £700 a year and have the potential to escalate annually. Discarding this fee would create a “fairer, more transparent homeownership [system] for thousands of homebuyers”.

“Abolishing these unreasonable costs will make the dream of home ownership a more affordable reality for the next generation of home buyers”.  Lord Stephen Greenhalgh, Leasehold Minister

Although the Leasehold Reform Act will not have a retroactive effect, the Competition Market Authority has also obtained commitments from big homebuilders who have stated that they will stop doubling ground charges annually.

“We want to reinforce the security that home ownership brings by changing forever the way we own homes and end some of the worst practices faced by homeowners.” Robert Jenrick MP, Housing Secretary

A government press release has announced that those who own houses with Aviva, Persimmon, Countryside Properties, Taylor Wimpey and more, will have their ground rate reduced to the amount it was when the home was first bought. The same press release has clarified that they are investigating Barratt Developments, Brigante Properties and Abacus Land and Adriatic Land.

How will this affect developers?

Any applicable contract or lease that has been made before the 30th of June 2022 will not be affected. However, it may be in a freeholder’s best interest to alter their pre-existing freeholds to reflect the legislative change. This is because the peppercorn amount leaseholds will be more attractive to potential leaseholders and an old leasehold may be at a market disadvantage.

Furthermore, developers must be able to accept that the changes brought about by the Leasehold Reform Act may mean that some leaseholders will pay ground rent whilst others will not. If this is not desirable and consistency is required, then developers may wish to vary the terms of the contracts that they have already exchanged.

The Property Litigation Association has reported that some developers have already given up the use of ground rents and have been acting in accordance with the up coming change. This may become more common as developers realise that leaseholds with ground rents of a substantial amount will be less desirable than those with leaseholds of a peppercorn amount.