New ground rent legislation problematic for developers

There has been an increase in the number of property developers contacting firms for advice in relation to the government’s leasehold reform of later living schemes.

The Leasehold Reform (Ground Rent) Act 2022 is part of a review of leasehold practices to prevent landlords from charging ground rents exceeding a nominal amount in new leases of residential properties.

Connie O’Donnell, a commercial property associate at national law firm Clarke Willmott, said: “The Act is intended to protect tenants from high ground rents from which they receive no benefit, however the reforms may cause problems for developers going forwards.

“Following implementation of the Act, developers will need to consider how the ongoing costs of running a later living complex can be recovered without affecting the viability of developments and may face challenges in respect of sales if the income from charging ground rents is recovered from other heads of income which then are seen to rise.”

O’Donnell explained that while traditional letting schemes focus on achieving a high density of lettable units, the area occupied by communal areas within retirement developments can amount to up to 30 per cent of the total floor space.

“Ground rents are often a central part of the funding structure of retirement complexes and allow developers to provide and maintain the facilities such as a fitness centre, laundry services, or swimming pool,” added O’Donnell.

The legislation restricts ground rents on new leaseholders to a peppercorn sum; if found in breach, landlords could be fined between £500 and £30,000, and tenants will be able to reclaim unlawfully charged ground rents, plus interest.

However, the Act only applies to leases granted after the implementation date, so solicitors should advise landlords of existing schemes that the measures will mean some occupants will be charged ground rent, and some will not.