The Leasehold Reform (Ground Rent) Bill 2021 will prevent landlords in England and Wales from charging ground rents in new leases of residential properties. This is intended to protect tenants from unfair charges, but presents a particular problem in the context of retirement housing. In this sector, ground rents are often an important part of the funding structure which allows developers to provide a range of communal spaces for residents' use. What will this ban mean for new retirement housing schemes?
Retirement housing and the Leasehold Reform (Ground Rent) Bill 2021
- How does the Government intend the new rules to impact on retirement housing?
- What does the Bill provide?
- Which leases will the new rules affect?
- Which leases will be exempted?
- What about existing residential leases?
- How will the retirement housing sector respond to this new law?
The Government introduced the Leasehold Reform (Ground Rent) Bill 2021 into Parliament on 12 May and it went through its second reading in the House of Lords earlier today. It will now move onto committee stage. It continues the process which started in 2017 when the Government announced a number of measures intended to end unfair practices in the residential leasehold market in England, including:
- prohibiting new residential long leases from being granted in respect of houses, other than in exceptional circumstances;
- enabling tenants of long residential leases to extend their leases for a peppercorn rent; and
- restricting ground rents in new leases of houses and flats to a nominal amount.
How does the Government intend the new rules to impact on retirement housing?
When it explored the applicability of the proposals to retirement housing, the Select Committee received a range of evidence from representatives of this sector. Some providers did not oppose a ban on ground rents, whereas others sought an exemption for retirement properties, explaining that ground rents were used to help cover the initial costs of construction, including for the significant shared facilities that are an essential ingredient of retirement developments. In some schemes, communal areas can amount to as much as 30% of the floor space. This contrasts with mainstream residential developments which tend to maximise the number of lettable units.
In its 2019 response document, the Government acknowledged that although most landlords in receipt of ground rent do not provide a significantly higher level of service than that which could be provided by the leaseholders themselves, this was not the case for either complex mixed-use developments or retirement properties.
However, the Government announced in January 2021 that the ban on ground rents would also apply to the retirement living sector. The one measure in the Bill that protects this sector is the provision that the ban will not come into force in relation to leases of retirement housing until 1 April 2023. Retirement housing leases are defined as leases which provide that the occupier of the dwelling must be 55 or older.
In the House of Lords debate today, one of the Lords suggested that an exemption should be provided for retirement developments which commenced before the Bill came into force but where units remain unsold on 1 April 2023.
What does the Bill provide?
It restricts ground rents on new long residential leases to one peppercorn per year. The Bill also prohibits landlords from demanding administration charges in relation to those peppercorn rents.
Although the Bill's explanatory notes explain that these new rules are not intended to prohibit the recovery of service charge costs, this is ambiguous on the face of the Bill. This point was emphasised in the debate in the House of Lords today and will be discussed at committee stage.
Which leases will the new rules affect?
- Leases of dwellings for more than 21 years granted on or after commencement of the relevant provision of the Bill;
- Leases granted for a fixed term with a continual renewal provision (other than a sub-lease of a lease which is not a long lease, or a lease that is terminated after a death, marriage or civil partnership); and
- Surrenders and regrants.
Penalties for non-compliance
- A breach will constitute a civil offence with a financial penalty of between £500 and £5,000.
- Trading standards authorities will enforce the new rules.
- Tenants will be able to reclaim unlawfully charged ground rents plus interest via the first-tier tribunal
Which leases will be exempted?
- Leases granted after commencement of the Act, where buyers and sellers entered into a legally binding contract in relation to the grant of the lease (other than an option or right of first refusal) before commencement;
- Business leases in respect of which the parties have exchanged notices that they intend to use the property for business purposes;
- Statutory lease extensions of houses under Part 1 of the Leasehold Reform Act 1967, or of flats under Chapter 2 of Part 1 of the Leasehold Reform, Housing and Urban Development Act 1993;
- Community-led housing, where the landlord is a community land trust, or a dwelling in a building controlled or managed by a co-operative society; and
- Home finance plan leases (in connection with a home reversion plan under Chapter 15A of Part 2 of the Financial Services and Markets Act (Regulated Activities) Order 2001, or leases granted by a finance provider to a homebuyer in connection with a ‘rent to buy’ arrangement).
Special rules will apply to shared ownership leases and certain leases that replace pre-commencement leases, whereby rent may continue to be charged on the landlord’s share of shared ownership leases, and where it is agreed on leases replacing pre-commencement leases on the remaining term of the pre-commencement leases.
What about existing residential leases?
How will the retirement housing sector respond to this new law?
The loss of the ability to charge ground rents will mean that many developers of retirement properties may need to rethink their funding models, as the majority of them currently use capitalised ground rents to help pay for the construction costs of shared spaces. Alternatives are likely to include:
- reducing the amount of communal space available;
- charging a higher premium for leases up front;
- charging an additional ongoing charge for the use of the communal spaces;
- charging an additional premium for the use of the communal spaces; and/or
- charging a deferred fee, sometimes known as an "event fee" when the lease is sold. As we noted in 2017, this kind of charge was investigated by the CMA in the context of care homes and then explored by the Law Commission, which concluded in its report that such event fees could provide valuable benefits for consumers (in particular by making specialist housing affordable by deferring part of the payment for services until they come to sell) but that they should be regulated through a Code of Practice supported by an amendment to the Consumer Rights Act 2015 to enable enforcement by consumers. The Government accepted the majority of these recommendations in 2019 but has yet to implement these reforms. In the meantime, various industry bodies such as ARCO (the Associated Retirement Community Operators, which represents some of the private and not-for-profit operators of housing-with-care schemes in the UK) have established their own codes of practice to meet the Law Commission's recommendations. In the House of Lords debate today, Lord Greenhalgh confirmed that this Bill will not prevent landlords in the retirement accommodation sector from continuing to charge event fees.
Many retirement housing developers already offer purchasers a choice of payment options so that they can select whether to pay a higher upfront costs and lower ongoing charges and deferred fees, or a lower initial premium and ongoing charges plus a higher deferred fee.
The Government is in the process of promoting commonhold as a replacement for leasehold, but some retirement living developers are looking at other alternatives such as:
- shared ownership, in which the resident buys a percentage of the value of a unit and pays rent in relation to the remaining portion; and/or
- licences to occupy (instead of leases) under which residents simply pay a monthly licence fee which covers the costs of living in the unit, receiving the services of their choice and accessing the communal parts of the development.
In the Queen's Speech earlier this month, the Government committed to improving the adult social care system. It is likely that the retirement housing sector will continue to play a key role in the provision of care and accommodation for older adults in the UK, and in that context it will be important to find a balance between consumer protection and viable development financing structures.