The ground rent scandal highlighted some of the onerous ground rent clauses which many leaseholders were dealing with. Some of these have led to ground rents running into the thousands per annum. In its 2020 report on lease extensions and enfranchisement, the Law Commission recommended that grounds rents from future leases of flats and houses be removed.
The Leasehold Reform (Ground Rent) Bill is currently at the Report Stage at the House of Lords and is expected to solve this problem, among others.
The current problems
An onerous ground rent can make a flat difficult to sell as it can put off buyers and lenders. Moreover a high ground rent (more than £1000 per annum in Greater London and more than £250 per annum outside Greater London) could result in a long lease being classed as an Assured Shorthold Tenancy giving landlords extended rights to repossess, (although there have been no reported terminations on that basis).
Currently a leaseholder can remove an onerous ground rent by exercising a right to a lease extension for an additional 90 years pursuant to the Leasehold Reform Housing and Urban Development Act. This will allow them to remove the ground rent for the remainder of the existing lease and pay no ground rent for the 90 year extension. However, they will need to compensate the landlord for the loss of ground rent for the remainder of the existing lease. So an onerous ground rent could be costly and you should seek advice from a competent surveyor. There is no right otherwise to remove an onerous ground rent clause as you cannot insist on a deed of variation in such circumstances. A freeholder may be prepared to enter into a deed of variation at a cost.
Is the Bill the solution?
When the legislation comes into force a landlord will no longer be able to include a ground rent provision on new leases. They could be fined up to £5000 if they do.
However, a leaseholder entering into a voluntary lease extension will still have to pay the ground rent set out in the lease for the remainder of the existing lease but not the extended term. The risk is that some landlords may decide to levy high premiums for voluntary lease extensions to make up for not being able to recover a ground rent for the extended term. The legislation will not allow parties to agree a lower premium and keep the ground rent for the remainder of the whole lease. This is separate from the 1993 Act right mentioned which essentially makes the leaseholder pay for the loss of ground rent. At least with a 1993 Act extension parties can apply to the First-Tier Tribunal where the premium is in dispute. This option is not available for voluntary leases.
An attempt at 'one size fits all'
From the outside, it looks as though the Bill will put a stop to the horror stories in recent years of leaseholders being trapped. However, its attempt at a ‘one size fits all’ approach may be flawed. Once the legislation comes into force it will remove the right for a leaseholder to pay a lower premium for a lease extension and retain some form of ground rent which may not be onerous. There are many leases with ground rents which are not classed as onerous and are perfectly affordable. Only time will tell if landlords will take advantage of the new provisions and levy higher premiums in voluntary lease extensions to compensate for the lack of a ground rent for the extended term. This may open the door to many more statutory lease extensions where the Tribunal can help determine the disputed term.
A report by the Competition and Markets Authority has already led some major players to change their ways. Two leading freeholders, Aviva and Persimmon Homes, have recently taken significant steps to deal with onerous ground rents. Aviva has removed escalating ground rents that, in some cases, doubled every 10 years and Persimmon has offered its leaseholders the opportunity to buy the freehold of their leasehold property at a discounted price.
The removal of ground rents will certainly be a blow for many landlords and developers. However, it does follow the theme of the Law Commission's recent reports on the residential leasehold sector which see a move to more focus on home owners. It is an archaic system in need of careful consideration and reform.