Ground rent reform – a sledgehammer to crack the wrong nut

This week, the House of Lords will scrutinise the Leasehold Reform (Ground Rent) Bill 2021-22. When enacted it will impose onerous penalties and yet it signally fails to tackle what most MPs and the public think is its main purpose.

Subject to some exceptions, it will become a civil offence to charge a ground rent of more than a peppercorn in any new lease of a single dwelling granted at a premium. The penalties are severe. Landlords can be fined a minimum of £500, and a maximum of £30,000. The Bill is meant to address the scandal of escalating rents, where initially small ground rents create serious problems for leaseholders. If rents double every 25 years, increases are roughly in line with the Retail Prices Index and are manageable. However, in recent years greedy landlord-developers of new builds have shortened the doubling period to 20 or even 10 years with dramatic effect.

Two major problems are caused by escalating ground rents. When the rent goes above £1000 pa in Greater London or £250 elsewhere, the tenancy becomes an assured tenancy and can be forfeited for some rent arrears. The courts have no discretion to grant relief from forfeiture. The landlord thereby receives a windfall. The lease becomes un-mortgageable and the property practically unsaleable.

The second problem is that rents doubling every 10 years will reach astronomical levels. A ground rent of £125 pa in a lease granted in 2021 for a term of 150 years, doubling every 25 years, will be £4,000 pa during the last ten years of the lease term. By contrast, if the rent doubles every 10 years the highest rent would be £2,048,000 pa and the total rent payable over the course of the lease will be nearly £41 million.

The Bill could easily amend the law so that such leases did not become assured tenancies – an easy change that nobody can reasonably object to. It could also put a cap on escalating ground rents.

The Department for Levelling Up, Housing & Communities knows that these are live issues but deals with neither of them. Instead, a landlord who grants a new lease with a ground rent of £5 a year fixed throughout the term may be fined up to £30,000 yet the landlord who holds or acquires the freehold of a lease with an escalating ground rent can continue to receive the benefit and can charge the leaseholder a substantial premium to vary the lease or can take the rent into account in an enfranchisement claim.

The Bill is a missed opportunity and a sledgehammer to crack the wrong nut.

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