English ground rent reforms a ‘concern for retirement living operators’

Out-Law News | 14 Feb 2022 | 11:38 am | 1 min. read

Reforms to ground rent rules that are set to come into force in England and Wales could lead to higher sale prices for retirement living operators and affect the viability of new retirement developments, according to one expert.

The Leasehold Reform (Ground Rent) Act will regulate future long residential leases, preventing freeholders from charging ground rents of more than a token ‘peppercorn’ rent per year. The Act also bans freeholders from charging administration fees for collecting peppercorn rents.

The reforms will only apply to leases granted on or after the date on which the new Act comes into force, which is not yet known. The changes will not apply to leases of retirement homes - and other leases where there is a minimum age requirement of 55 – until 1 April 2023.

Sarah Barlas, real estate law expert at Pinsent Masons, said the reforms could be a “concern for retirement living operators,” adding, “Communal areas at their sites often take up approximately 30% of the floor space of the whole site and can cost upwards of £2 million to build.”

“Those spaces cannot be sold off to residents or rented out and therefore the construction costs need to be recovered in another way. Many operators rely on ground rent to recover some of those costs and will have budgeted for previous developments on that basis,” Barlas said.

The Act does not consider charges for council tax, services, repairs, maintenance and insurance to be rent, even if they are referred to as part of the rent in a lease agreement. It means landlords will still be able to demand service charges and ‘event fees’.

An ‘event fee’ is a charge related to a residential lease on a retirement property. Leaseholders must pay a fee to the retirement home operators if certain events take place, such as resale or sub-letting of the property.

Barlas added: “Whilst some operators are already adopting a new model which does not include ground rents, this could lead to higher sale prices and affect the viability of new developments. It will also mean that ‘event fees’ will likely become the norm as operators seek to recover lost ground rent income.”

Under the new rules, landlords must refund any new ground rent payments they receive – even if they were not demanded – to their tenants within 28 days of receipt. The maximum financial penalty for either requiring a tenant to make a payment of ground rent, or failing to refund a payment, is £30,000.

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