Leasehold reform: Ground Rent Bill gains some much needed clarity

On 20 July 2021, the House of Lords' marshalled list of amendments (the Lords Report) on the Leasehold Reform (Ground Rent) Bill (the Bill) was published. This provided some much needed amendments to the Bill which was first introduced on 13 May 2021 and on which we reported in our earlier blog.

In summary, the provisions of the Bill will regulate future long residential leases for a term exceeding 21 years (so-called "regulated leases") which are granted on or after the date on which the Bill comes into force (such date still to be confirmed). The Bill is intended to restrict the payment of rents (see further below) in these regulated leases such that these leases can then make no financial demand in respect of a ground rent and instead only a "peppercorn rent" will apply.

It should be noted that the Bill may be further amended during its passage through Parliament.

Key Amendments to the Bill following the Lords Report

Following spirited debate in the House of Lords on the original provisions of the Bill (which included a detailed reference to our own submission to the Law Society in support of amendments), the Lords Report has been produced whereby the Bill is reprinted to include all the agreed amendments. The Bill then moves to a third reading and a further chance for the House of Lords to discuss and amend the Bill as it nears conclusion.

Some of the key amendments to the Bill following the Lords Report are as follows:

1. The original Bill did not differentiate between ground rent and any other kind of rent reserved by a lease, meaning there was a risk that landlords would not have been able to recover from tenants sums such as service charge or insurance rent for anything other than a peppercorn. This anomaly has been addressed specifically, with a new interpretation clause 23(3) added to the Bill which now provides that: "a sum expressed to be payable in respect of rates, council tax, services, repairs, maintenance, insurance or other ancillary matters is not rent for the purposes of this Act merely because it is reserved as rent in the lease."  As such, the operation of the Bill should not now affect the recovery of sums such as service charge or insurance rent even if they are reserved as rents under the regulated lease.
2. For a lease to be regulated by the Bill, it must now be a long lease of a "single" dwelling. This amendment has been added to clarify that the legislation is intended to protect individual leaseholders and is not intended to inadvertently put an end to standard business practices by restricting arrangements where a lease is granted for multiple dwellings, such as where a business has a lease for all or part of a building.
3. The long lease must now also be "granted for a premium". This amendment has been included to prevent the Bill applying to a small number of long residential leases where no premium is paid for the granting of the lease and, instead, a market rent is paid by the leaseholder throughout the term. "Premium" is now defined as "any consideration in money or money’s worth for the grant of a lease, other than rent".
4. A duty to inform a tenant of the changes introduced by the Bill has now been introduced. This amendment requires landlords to let tenants know of the upcoming changes to ground rents with the aim of preventing lease extensions before the changes in this Bill are implemented.
5. Finally, the maximum financial penalty for either:
   1. requiring the tenant to make a payment of prohibited rent (a ground rent); or
   2. breaching the new aforementioned duty to inform the tenant of the changes introduced by the Bill,

has been increased from £5,000 to £30,000. This is in line with other housing legislation, namely the Tenant Fees Act 2019.

Interestingly, no amendment has been made to the Bill in relation to the application of the legislation to "deemed surrender and re-grant" situations. The concern is that landlords would be less likely to accede to tenants' requests to make changes to a lease, with the risk that the Bill would then apply to that lease and prohibit the recovery of anything other than a peppercorn ground rent going forward. Some members of the House of Lords appear to consider that no amendments need to be made to the Bill because the same outcome can be achieved with the grant of an additional separate lease, rather than varying the existing lease, so that the ground rent can remain on the unaltered existing lease. However, this seems like it could still give rise to some unintended consequences if the application of the Bill to surrender and re-grant situations are not fully understood by some landlords.

As at the date of writing, a third reading of the Bill in the House of Lords is yet to be scheduled, so keep watching this space.

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