Adapting to ground rent reform – the developer and investor perspective

This Autumn, the Leasehold Reform (Ground Rents) Bill is anticipated to be enacted. In leases granted after this time, landlords will be no longer be able to recover ground rent from tenants.

Although the legislation will not have a retrospective effect, help may be at hand for some tenants under existing leases containing obligations to pay ground rents that rise sharply year-on-year.

How has this come about?

The Competition and Markets Authority (CMA) launched an investigation, at the Government’s request, into potential breaches of consumer law in the leasehold market in June 2019.

Having identified a number of serious concerns, including escalating ground rents, the CMA commenced a series of cases against some of the UK’s largest house builders and investors. Some of those cases have been compromised on the basis of undertakings to remove such clauses from existing leases.

Future action

Fortified by these early successes, the CMA has said that it expects other developers and investors to follow suit or face legal action.

At greatest risk are landlords who have granted leases which provide for ground rents to double more than every 20 years, particularly if the escalator is linked to the Retail Prices Index (RPI). These leases are considered to have the worst consequences for tenants wishing to sell or mortgage their property. In certain circumstances security of tenure may also be eroded.

The question now for developers and investors is whether to pre-empt proceedings by varying existing leases, which are of the sort that may attract scrutiny, or sit tight and hope that the CMA does not come knocking at the door.

To talk to our leasehold team, please get in touch.