With the Leasehold Reform (Ground Rent) Act 2022 coming into force on 30 June 2022, this would be a good time to discuss the implications it will have on long Leases and Lease extensions more generally
The act is a statute that both leaseholders and freeholders of long residential Leases of property – for instance, a flat in a purpose-built or converted block – need to know about.
First, we will go over the statutory right of a leaseholder to extend their long residential Lease.
Extending a Lease: the original procedure
The extension of long residential Leases is still governed by the Leasehold Reform, Housing, and Urban Development Act 1993 (LRHUDA). This gives all Leaseholders on long Leases of residential properties who have held the Lease for at least two years the right to extend their Lease by a further 90 years upon service of a notice upon the freeholder or other competent landlord.
The extension of such a Lease is important; many mortgage lenders will not lend on a leasehold property with under 70 years remaining on the Lease.
The Notice under section 42 of that Act sets out the premium that the leaseholder believes would be payable for the extension of the Lease. The freeholder then has a limited time period (set out in the section 42 Notice, but not less than two months) to respond to the notice with their proposed premium and terms, as well as any grounds for opposition that the legislation permits them.
A Landlord who does not put in a counter-notice within the allotted time risks the tenant applying to the Court for an order extending the Lease on the terms, and for the premium set out in their section 42 Notice.
There is also a statutory procedure for the Court to exercise its jurisdiction to extend the Lease where the landlord is unknown or absent, though the Court will usually require the leaseholder to demonstrate what steps they have taken to find the landlord or communicate with them first.
If a counter-notice is put in, the parties will usually enlist their respective surveyors to negotiate the premium and terms for the extension. If an extension is agreed upon, it is usually implemented by a deed of surrender and regrant on the existing Lease, which will be required if the parties seek to renegotiate terms.
If an extension cannot be agreed after six months of the counter-notice being served, the parties may apply to the relevant First Tier Tribunal to set the terms and premium of the extended Lease.
The reason that we are reviewing these items here is that the new Act is not necessarily applicable to extended long Leaseholds.
The new Act: Regulated and Excepted Leases
Section 1 of the new Act divides all leaseholds into regulated and excepted Leases.
A regulated leasehold is any long Lease, with a premium paid at the outset, of a single dwelling, that is not a business Lease (i.e. not let for commercial use), and is not a shared ownership Lease, so long as it is granted after 30 June 2022.
The issue is this: is extending a Lease under Leasehold Reform, Housing, and Urban Development Act 1993 (LRHUDA) sufficient to trigger this act and reduce all ground rents payable by the leaseholder to the freeholder to a peppercorn rent?
Unfortunately, the answer is not that simple.
The main upshot of the act is that from 30 June 2022, all new long residential Leases will be restricted to ground rents of a peppercorn, except in the case of shared ownership properties or business Leases. A ‘peppercorn rent’ is a nominal payment of one peppercorn per annum if so demanded – in practice, a peppercorn rent means zero ground rent.
Dealing with a replacement Lease
This will also apply to any new Lease of such premises that is made by way of surrender and regrant and also by any variation which amounts to a deemed surrender and regrant. But any Lease considered to be a “replacement Lease” by the Act will not benefit from this peppercorn ground rent until the original term of years envisaged on the Lease is up; the peppercorn ground rent will only apply once the period of the extension begins.
Section 6 of the Act divides any “replacement Lease” into two parts.
- an “excepted period” running from the start of the replacement Lease up until the date the original Lease would have expired, during which ground rent is payable, and
- a “regulated period” running from the end of the term of the original Lease up until the end of the term of the replacement Lease.
For instance, suppose a leaseholder holds a 99 year Lease with 70 years still to run on it from the current date, and on today’s date (10 May 2022, for example) an extension of the Lease is ordered by a Court of Tribunal of 90 years. Ground rent will still be payable up until the date of expiry of the original Lease, that is, for the next 70 years (until 10 May 2092), and for the period of 90 years thereafter, a peppercorn ground rent only will be payable (from 11 May 2092 until 10 May 2182). The freeholder will still be able to extract a ground rent from the leaseholder until the original term would have expired.
However, if the replacement Lease is dealt with by way of surrender and regrant, this may circumvent the above provision relating to replacement Leases. This may include where it is deemed a surrender and regrant (i.e. the parties have varied the Lease in such a way that the rent frequency or extent of the property leased to the lessee or some other fundamental provision of the Lease is altered), and as such no ground rent will be payable.
Issues affecting Leaseholders
Leaseholders should therefore not assume that they can extend their Lease to take advantage of the zeroing of ground rents by way of this Act, as the landlord may refuse to engage in the process. The landlord may be aware that where the Lease is extended by way of Court or Tribunal proceedings this will preserve their right to collect ground rent.
The leaseholder may wish to offer an elevated premium in exchange for a reduction to the peppercorn ground rent, especially as an onerous ground rent may make it difficult to sell or mortgage a leasehold property. However the reduction of ground rent is not necessarily something that, in the context of an LRHUDA Lease extension, the Court has the jurisdiction to order should that prove necessary, and such a Lease extension by way of Court or Tribunal will not trigger this Act.
Issues for Freeholders
For freeholders, this means that extending a Lease will not guarantee further ground rent beyond the term of the Lease previously in place, though if it was already extended prior to 30 June 2022, the ground rent is chargeable until the end of that extension.
Freeholders may want to be cautious about agreeing to any extension of the Lease that is implemented by, or may need to be implemented by, a surrender and regrant as that may result in the statutory nullification of ground rents by dint of this Act. Instead, they may insist that tenants use the statutory process if they wish to preserve a ground rent income stream. The need to be circumspect about varying Leases is also present: if a Lease is varied in such a way that it amounts to deemed surrender and regrant, then an unintentional side effect may be the zeroing of ground rents payable as a result of this Act.
Advice for Leaseholders and Freeholders
It is important that both leaseholders and freeholders of long residential Leases get to grips with the new leasehold regime.
The Act sets out financial sanctions and the prospect of tenants taking Tribunal action against landlords who attempt to collect ground rent when it is prohibited by this Act.
These sanctions can be triggered by accepting or demanding any ground rent prohibited by this Act, and even by not refunding payments made within 28 days to a leaseholder who pays when they are not required to. These sanctions include an order requiring the freeholder to refund any or all prohibited rent to the leaseholder as well as financial penalties ranging from £500 to £30,000.
Talk to landlord and tenant specialists
Cunningtons can advise both leaseholders and freeholders on the extension of long residential Leases, including in situations where the freeholder is absent or where a premium cannot be agreed upon and Court proceedings may become necessary.
We can also advise both leaseholders and freeholders of their rights under this Act.
Please feel free to contact the Litigation department in Braintree on 01376 326868 for a confidential discussion if you are in need of advice on this matter.