UK government residential property reform: goodbye to land rents | Hogan Lovells
A ground rent is a sum of money paid by a long-term residential tenant, usually on an annual basis, under the terms of their lease. It can be a fixed amount or one designed to increase over time, either by a specific amount or by reference to indexation.
Land rents represent the income from a real estate investment in the hands of the owner and have for some time been an important part of many private house building programs, where the investor funding the program relies on the income from land rents. .
But land rents have, for one reason or another, come under increasing criticism in recent years. First of all, the tenant does not perceive any additional benefit from the payment of the rent of the ground: it is only a cost. Second, leases are inherently a depreciable asset. Over the years, the lease loses its value, but the tenant still has to pay the rent for the land. Third, there have been high-profile cases of alleged abuse, with some landlords tying involuntary tenants to leases with extremely high or exponentially increasing ground rent obligations.
It was back in 2018 as the UK government first consulted on various aspects of residential real estate reform, including banning new leaseholds, capping land rents and shaking up emancipation and condominium laws, but progress was slow until early 2021, when there was a flurry of announcements, including the creation of new condominium boards.
In the first stage of its proposed reforms, the government made a firm commitment to “set future land rents at zero”, and on May 12, the draft law on the reform of the lease (land rent) was presented to the House of Lords.
The new land rents will be limited to a peppercorn
The draft law in its current form prohibits the granting of new emphyteutic leases (that is to say leases of 21 years or more) (“regulated leases”) with a land rent greater than a grain of pepper. Landlords found guilty of breaking the new law will face fines of £ 5,000, and tenants can apply to the lower court for an order ordering repayment of illegal land rents paid to their landlord or a previous landlord. Right now the bill appears capable of encompassing a range of charges other than ground rent which does not appear to be the intent behind the bill and we assume this will be corrected in due course.
The bill excludes condominium leases from the reform. This is a kind of lease where the tenant buys part of the property without fully owning it and pays rent to the landlord until they become 100% owner. Rent is a necessary part of this process. There are also exceptions for social housing leases and rental structures used for specific financing purposes such as Sharia financing. On the other hand, retirement buildings will not be immune to the floor rent ceiling, although the new law will not apply to retirement buildings until April 2023.
Ground rents under existing leases will not be affected, although the transitional provisions address situations such as the granting of a new lease after the expiration of an existing lease. There are also anti-avoidance provisions, so that land rents are not disguised as other charges and fees, and leases granted after the enactment of legislation under agreements exchanged before that date will be covered by the new law.
The new landscape
The housing development and residential investment sectors have had several years to prepare for this significant change in the law. Criticisms of onerous land rents have circulated in the market for many years, and for some time a number of major lenders have refused to lend against leases affected by rising land rents. The recommendations of the Law Commission and the government’s announcements over the past few years point to legislative changes that are finally materializing thanks to this bill and the promise of new reforms underway.
New housing developers will have to rely on financing structures that encourage investment despite the absence of reliable land profitability. Industry will need to find inventive solutions, as neither government nor other stakeholders will want the abolition of ground rents, a reaction to perceived abuses of a long-standing feature of the residential market, to negatively affect supply. future of the indispensable housing stock in Great Britain.