Ground Rent Charges For New Leasehold Properties To Be Banned Under New Bill

On 13th May, the Leasehold Reform (Ground Rent) Bill was published, following its inclusion in the Queen’s Speech to Parliament.

What is the Leasehold Reform (Ground Rent) Bill?

The Bill is designed to tackle inconsistency and uncertainty of ground rents for future leaseholders in new residential long leases.

The Bill will (if it becomes law) ban freeholders charging leaseholders ground rent charges in new leasehold agreements of newly built residential properties – making leaseholders pay just a ‘peppercorn rent’ level (a token or nominal rent) each year, in England and Wales. The Bill will also “introduce new rights for Trading Standards to levy penalties on freeholders of up to £5000 for breaches of the law”.

There will be some exemptions to the new rules outlined in the Leasehold Reform (Ground Rent) Bill whereby ground rent can still be charged. These exemptions include:

  • Business leases where people need to live in the same premises as their workplace to continue to do this and agree with their freeholder the most beneficial and appropriate terms;
  • Some parts of the community-led housing sector, so that freeholders can retain the right to levy ground rent to maintain their ability to further promote community activities; and
  • Certain financial products, which depend on leasehold agreements where rent replaces interest-bearing mortgage repayments.

In recent years, many have called for there to be a ban put in place with regards to ground rent clauses in leaseholds for new build homes. The Government had previously stated that it was looking to do this, with the Housing Secretary, Robert Jenrick, having said that unfair leasehold terms, including doubling ground rent costs, have “no place in our housing market“.

What is the current problem with ground rent charges in England and Wales?

The issue of unfair ground rent costs first began in the 2000s when developers started selling homes on a leasehold, rather than freehold, basis, and often without the buyer fully understanding the contracts they were entering into. In a number of instances, the freeholds were then sold to offshore investors, who then demanded large sums from leaseholders to buy out these contracts.

Additionally, in the past, ground rent charges tended to be low – no more than around £50 per year. This has changed in more recent years, whereby housebuilders have started to increase ground rents to an initial charge of between £250 to £500 a year. They have also added clauses in the lease that allow them to review the ground rent periodically, for example, every five, 10 or 25 years. Typically, the review clause permits the freeholder to increase the ground rent at each review.

Whilst, in theory, a ground rent that doubles every 10 years doesn’t sound too severe, as the majority of leases are set for a long term, such as 999 years, if a ground rent of £250 per year doubles every 10 years, the leaseholder could be expected to pay £16,000 per year after 60 years!

Due to the national publicity of the scandal in recent times, many prospective buyers are now aware of the problem and unfortunately, will not buy a property with an onerous ground rent clause. The existence of such clauses has also led to many mortgage lenders refusing to lend on those properties. This means that, in the unlikely event that a buyer is still prepared to buy a property affected by a ground rent clause, they are highly unlikely to be able to obtain a mortgage to complete the purchase.

Even to a cash buyer, a property affected by the onerous ground rent terms will be unattractive, as the burden of the ground rent clause will be inherited via the purchase.

What about those already who are already in leasehold agreements that have to pay onerous ground rent charges?

Whilst the expected rollout of the Bill is excellent news for those looking to enter into a new leasehold agreement for a new build property, it will not help the 4.5million leaseholders in England and Wales who are already in leasehold agreements and will still be liable for ground rent costs.

However, one implication of the new Bill is that the rules could be applied to an existing lease which is varied. The varied lease could be perceived as being a new lease under the Bill, which would mean that any ground rent clauses within the lease would be unenforceable going forwards.

Ground rent claims

For those who are already in leasehold agreements, have to pay excessive amounts of ground rent due to onerous clauses and won’t benefit from the new Bill, all is not lost. These leaseholders may be able to make a claim for professional negligence against the solicitor that acted on their purchase for failing to advise them of the problems with the ground rents.

If you are a leaseholder and you think you may have an escalating ground rent clause in your lease, you may be able to bring a claim.

Leasehold Reform (Ground Rent) BillHow can Nelsons help

Daniel Brumpton is a Partner in our expert Dispute Resolution team, specialising in ground rent claims.

At Nelsons, we’re ready to help people who have found themselves unwillingly involved in the leasehold mis-selling scandal to bring a professional negligence claim against the conveyancing solicitor they instructed to help with the purchase of the property. If the solicitor failed to give you advice about the existence and implications of the onerous ground rent clause, we can assist you in suing for damages, which could be put towards purchasing your freehold from the freeholder.

If you are concerned about the ground rent provisions in your leasehold, please call Daniel or another member of our team in DerbyLeicester or Nottingham on 0800 024 1976 or contact us via our online enquiry form.