Following widespread calls for change, the Leasehold Reform (Ground Rent) Act 2022 will finally come into force at the end of this month on 30 June 2022, the exception being retirement properties which will not be affected until 1 April 2023.

The Act will limit ground rent in most new long residential leases to one peppercorn per annum, effectively abolishing rental income returns available to landlords and developers.

Whilst there have been concerns about escalating ground rent provisions in existing leases, the Act will not have retrospective effect. Should an existing lease be surrendered and re-granted however, it may very well be caught by the provisions of the Act.

The Act will apply to ‘regulated leases’, which means long leases granted for a term of more than 21 years of a single dwelling in exchange for a premium, on or after 30 June 2022.

There are exceptions and the Act will not apply if a lease is granted after 30 June 2022 pursuant to a prior agreement. Thus, if contracts have exchanged before 30 June 2022 and the grant of a new lease takes place after 30 June 2022, the lease will not fall within the scope of the Act and a ground rent above a peppercorn may be charged. If exchange and completion take place after 30 June 2022 however, the Act applies in full and only a peppercorn ground rent is chargeable.

Business leases, statutory lease extensions of houses and flats, community housing leases, and home finance plan leases are excluded.

Where a voluntary lease extension of a house or a flat is granted after 30 June 2022, the ground rent specified in the existing lease will continue to be payable for the remainder of the original term of the lease and a peppercorn rent will then be payable for the extended term.

There are serious sanctions for non-compliance with the Act and Landlords may face fines ranging from £500 to £30,000 per lease.

The abolishment of ground rents in new leases is part of a package of lease reforms which the Government intends to implement, including substantial changes to the calculation of premiums and procedures for lease extensions and collective enfranchisement. 

Sayrha Elahi

Senior Associate Solicitor

In York House (Chelsea) Ltd v Thompson and another [2019] EWHC 2203 (Ch), the High Court held that the grant of new leases of various parts of a block of flats for no premium and at a peppercorn rent, by the husband and wife freehold owners to one or other of themselves, was an exempt disposal.

In order to preserve the development value in various parts of the premises and also to frustrate a prospective collective enfranchisement claim by the tenants, the landlords granted fourteen leases to one or other of themselves of various corridors, airspace, courtyards and other parts of a block of forty-two flats in Chelsea. No premium was paid, and the rent was a peppercorn in each case. 

Section 5 notices offering the tenants a right of first refusal under the Landlord and Tenant Act 1987 were not served.

A number of tenants subsequently initiated a claim for collective enfranchisement to acquire the freehold of the block and sought an order that the Leases be transferred to them.

There were a number of issues, including whether the leases fell within the exemptions for transfers by joint owners or gifts to a family member.

The High Court held that the granting of the leases constituted a gift to a member of the landlord’s family and were not a relevant disposal, therefore being exempt from the procedural requirements under the Landlord and Tenant Act 1987. Section 5 notices had not been necessary and the tenants could not compel a transfer of the leases to themselves. The motivation behind the grant of the leases was not relevant.

Where a collective enfranchisement claim is possible or expected, landlords are keen to try to ringfence development opportunities for their own future benefit. This decision shows that it is possible to take certain measures without triggering the right of first refusal.

It is important for landlords to remember however that any such leases may still nevertheless be liable to acquisition by the tenants as part of a collective enfranchisement claim (see, for example, LM Homes Ltd and others v Queen Court Freehold Company Ltd [2018] UKUT 367 (LC) from my blog here)

If you require advice on collective enfranchisement, please do not hesitate to contact our Enfranchisement Department and we will be happy to help.

Sayrha Elahi

Associate Solicitor

A recent tribunal decision highlights the challenges faced in ring fencing the possibility of development of basements, airspace and subsoil when there is a claim for collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993 (“LRHUDA 1993”).

In the case of LM Homes Ltd and others v Queen Court Freehold Company Ltd [2018] UKUT 367 (LC) (20 December 2018) the claim related to a block of 45 flats. Terms had been agreed with the nominee purchaser (the leaseholders’ representative) for the acquisition of the freehold and other intermediate interests and various transfers had been completed.

The landlord had previously granted separate 999 year leases of the basement, airspace and subsoil, allowing development of each of these areas if planning permission was obtained. The tenants of the basement, airspace and subsoil disputed the nominee purchaser’s entitlement to acquire their leases as part of the claim, however the Tribunal found in favour of the nominee purchaser. There was an appeal.

A collective enfranchisement claim is initiated by service of a notice under section 13 of LHRUDA 1993. The nominee purchaser’s notice continues in force “until a binding contract is entered into in pursuance of the notice”. Binding contracts had been entered into by the completion of various transfers pursuant to the notice and it was argued that the notice therefore no longer had any effect. The Upper Tribunal disagreed, holding that a binding contract includes both the singular and the plural and that LRHUDA 1993 clearly contemplates that more than one contract might be required to complete the acquisition of all the interests to which a nominee purchaser may be entitled.

It was further held that a nominee purchaser has the right to acquire any lease whose demise includes common parts of the relevant premises where the acquisition of the interest is reasonably necessary for the proper management or maintenance of those common parts. It was concluded that the basement, subsoil and airspace leases all satisfied this test.

The basement constituted common parts, as it contained a boiler which served the flats. The subsoil formed part of the exterior of the building, as did the airspace above meaning both also fell within the definition of common parts. As development of these areas would significantly hinder the tenants’ ability to maintain these areas, the nominee purchaser was entitled to acquire them.

This decision will be welcomed by tenants, as it follows the wide interpretation given to common parts and recognises the tenants’ need for control of all parts of the relevant premises for effective management, but also demonstrates to landlords and investors the difficulties involved in trying to ring fence parts of a property for future development where there is a possibility of the tenants bringing a claim for collective enfranchisement.

We understand that the case is going to further appeal.

If you require advice on collective enfranchisement, please do not hesitate to contact our Enfranchisement Department and we will be happy to help. 

Sayrha Elahi

Associate Solicitor

In the October 2018 Budget, the government announced it would consult on the introduction of an SDLT surcharge on non-UK residents purchasing residential properties in England and Northern Ireland. The consultation is now open.

Any foreign investor in UK property who is unable to prove that they have been a resident in the UK for at least 183 days prior to their purchase will be charged an additional 1% on top of the relevant SDLT due on the property. This includes the enhanced rates payable on second and investment property.

The surcharge will apply to purchases of residential property made by non-UK resident individuals and non-natural persons including companies, trusts and partnerships.

The rules will also be applicable to joint purchasers where one of them is a non-UK resident.

A refund will be available to foreign buyers that can prove they have been a resident in the UK for 183 consecutive days following the purchase date, however.

The consultation period ends on 6 May 2019.

Sayrha Elahi

Associate Solicitor