The Leasehold Reform (Ground Rent) Act 2022 (the Act) came into force on 30 June 2022 and seeks to address escalating ground rents in long leases. The Act prohibits Landlords from charging more than a ‘peppercorn’ per year for ground rent.
Originally, ground rent was a tax that the lord who owned (or administered) the land charged to the individual whom he let use it. Most land was ultimately owned by the Crown and as those using the land became more affluent through trade, the Crown (wanting a bigger cut) could increase the ground rent it was charging.
Over time, the Crown sold the freehold of much of its land and ground rent simply became an additional financial charge to tenants, often including provisions to increase the sum throughout the duration of the Lease. Whilst landlords benefitted from an additional chargeable rent, banks’ concerns over the limitless nature of potential increases to the sum, saw lending criteria tighten. As a consequence, the ability for tenants to borrow against their properties reduced and if they wished to sell, cash buyers were becoming their only option.
What is a peppercorn ground rent?
Peppercorn ground rent is a clause in a lease agreement that requires the leaseholder to pay the freeholder one peppercorn per year as rent, but in reality, the payment is zero. It originated from the need for both parties to exchange something of value, known as a consideration, to make a contract legally binding. The peppercorn spice was once a valuable commodity, making them a suitable form of consideration in lease agreements. Therefore, peppercorn ground rent became a popular practice as a token consideration for ground rent provisions.
Ground rent reform
Only long residential leases (those for a period of 21 years or more) that were entered into from and including 30th June 2022 are affected the Act. Retirement home leases remain unaffected until 1st April 2023, when similar legislation to the Act will be coming into force. Shared-ownership leases are also affected, however, the landlord can still charge rent in respect of his share. Some properties are exempt from the Act, such as commercial leases.
As the Act only applies to new leases and cannot be applied retrospectively, many tenants may be thinking “what about me?”. They will be pleased to know that if they have lived in the property for over two years, their ground rent can be reduced to a peppercorn upon extension or variation of their existing lease. This is caveated, however, such that it is only the extended portion of the lease that will receive the benefit of the peppercorn ground rent.
There are fines in place of up to £30,000 to deter Landlords from attempting to collect ground rent of more than a peppercorn, as well as provisions to prevent the use of “administration fees” as a disguised ground rent.
So, when purchasing a long lease of a residential dwelling from 30th June 2022, tenants/purchasers should expect to see a ground rent of no more than a peppercorn!