Once the Leasehold Reform (Ground Rent) Bill comes into force, ground rent for long residential leases will be capped at a peppercorn – to the delight of private residential tenants (particularly the tenants of new builds).

All shared ownership properties are sold on a long lease. These leases will reserve a ground rent in addition to the rent payable for the share of the property not owned by the tenant. The bill proposes to include shared ownership leases in the new law, thereby limiting the ground rent to a peppercorn. This may not be a significant change in practice as the model shared ownership lease has for many years been drafted to set the ground rent as a peppercorn.

The bill only applies to the ground rent on a shared ownership lease (which in these leases is usually called ‘minimum rent’) and not the rent which the tenant pays for the share of the property that they do not currently own. Section 5 specifically states at 5(2)(b) that the permitted rent in respect of the landlord’s share in the property is ‘any rent’. As the share not owned by the tenant is the landlord’s share the rent for that is not capped at a peppercorn.

The government is clearly – and admirably - seeking to protect consumers through the new legislation. The bill, which has yet to receive royal assent, makes it an offence for landlords to request payment of ground rents on new regulated leases - unless there is evidence of shared ownership. Breach of the rules could result in a fine of up to £5,000.

What’s the background?

There has been a high-profile public campaign to tackle the increasing unfairness of the doubling of ground rent in the residential property sector. The drastic increases in ground rent have been seen not only as unfair, but also increasingly greedy on the part of landlords - not least because it is considered a payment for no return from the landlord.

Meanwhile, the Competition and Markets Authority (CMA) has undertaken high profile investigations into the activities of housing developers around the hikes in ground rent and secured a number of commitments from the likes of Aviva and Barratts. They announced they would no longer continue the practice of double ground rents. Other developers have followed suit.

However, critics warn that the new rules could impact the quality of homes because landlords will no longer have a ready pot of cash, comprising the ground rents previously derived, to fund repairs and maintenance. With the removal of this long term source of income, what resources will landlords turn to then, and will they become disinterested around the state of repair of the building – until they can no longer ignore the issues?

Commonhold - the future?

Separately, the Law Commission recommended in 2020 allowing shared ownership leases to be granted within commonholds (the freehold ownership of flats by owners, who collectively make management decisions as to their development). In fact, it recommended making commonhold “a preferred form of homeownership to residential leasehold”.

So once passed, the leasehold reform bill could well lead to government making concerted moves towards adopting the Law Commission’s recommendations on commonhold.

In January 2021, the Government indicated that it is indeed intending to do move away from the existing leasehold system towards a commonhold system. But there is much work to be done before it becomes a reality – and a distinctly new era for the residential sector