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Are ground rents being banned?

This Act, which received Royal Assent on 8th February 2022, effectively bans ground rent for all new leases.  It also restricts the rents that can be charged on leases renewed on existing leases. When the Act comes into force, it will have a significant impact on the residential leasehold sector.

According to the Department for Levelling Up Housing and Communities’ announcement accompanied by the Royal Assent, the Act will take effect ‘within six months’ – if this is correct then this means by the 8th of August 2022.

This Act is set to eliminate ground rent for residential leases – much to the delight of many leasehold campaigners. This is a major change for the legal landscape.

The Act is very broadly drafted and will catch any attempt to impose a ground rent in a new lease after it becomes law.

There are going to be the following exceptions:

  • Lease renewals where the rent must remain the same until the old lease expires, after which it must be a peppercorn (zero); and
  • Leases granted under contracts exchanged before the Act takes effect.

Furthermore, there are adjustments for the retirement sector, and there is a ‘rent to buy’ model as well as shared ownership leases.  Leases for commercial properties (businesses) are also exempt.

After the so-called “Leasehold Scandal”, in which developers sold certain properties, (most notably houses in the North West of England) with accelerating ground rent provisions, the campaign to remove ground rent in residential leases gained momentum. Due to these rents, the properties were difficult or impossible to mortgage, leading to an understandable backlash.

According to some, a modest ground rent is not a problem. Regardless, the potential for abuse has led to the current situation, which is the banning of ground rent in brand new leases.

This move, which is probably part of a larger effort to pave the way for commonhold, shows political will on the part of the government.

In the future, developers will have to accept that new build flats will not generate ground rent – a valuable source of income often used for part-financing development and providing stable income for pension funds.

A house and keys