Residential Newsletter - Summer 2022

Residential Reflections

Each quarter, we ask our experts in the Residential Conveyancing team to reflect on an interesting piece of news, work or a case within their sector. In this edition of the Residential Newsletter, we consider restrictive covenants:-Title registers at the Land Registry contain hundreds of thousands of restrictive covenants (i.e. contracts made between two landowners where one landowner promises the other landowner not to carry out certain acts on their own land). What is the most unusual restrictive covenant you have seen on a title and, if you encountered it in a transaction you were involved in, did it cause issues for you in that transaction?

Sarah Major, Senior Associate (Manchester)“I find that the most unusual covenants are those associated with old conveyances where restrictions on use are based on what was popular back then, for example, soap boiling, slaughterhouse, tannery, etc. Potential enforceability of a covenant should never be forgotten but, for these types of restriction, I always smile at the absurdity of someone wanting to do anything of that nature in a residential house in this day and age.“I have previously come across a condition that was not contained in the title itself but in a planning permission. The property had an occupation condition requiring the person to be employed wholly in agriculture or forestry, to include dependants, due to the location of the property. The matter did not proceed for other reasons but the condition did cause concern given there was a lender involved and our client worked for Matalan.”

Caroline Wofinden, Director and Head of New Build & Social Housing (Nottingham)“The most unusual ones I have come across were where we had a new build development, and the title contained a lot of religious and moral/ethical-based restrictions as it had been sold by a religious organisation. No part of the property could be used for the manufacture, sale, supply or distribution of arms, weapons or contraceptive materials, nor could it be used to carry out or advise on human embryo experiments, abortion, euthanasia or assisted suicide, amongst a lot of other things. This didn't cause any issues on plot sales but there were a lot of restrictions to wade through!”Hannah Gidney, Associate (Oxford)“I was once asked to provide consent under a covenant for a mamma duck and her ducklings, who were floating down the river at the rear of the property at the time when the selling agent was taking photos; the covenant in question concerned not keeping any animals at the property other than the usual domestic pets. I responded to the request with, “the ducks do not reside at the property, they merely took advantage of a photo opportunity while the agent attended the property!”

Residential Leasehold Reform... the journey so far

Like many other interested parties, we have been keeping a watching brief on Government proposals for reform of the residential leasehold sector, including articles in the Autumn/Winter 2020 and Spring 2021 editions of our Residential Newsletter.What progress has been made to date?So, the big change is the Leasehold Reform (Ground Rent) Act 2022 (the Act) receiving Royal Assent on 8 February 2022. It's the first in a series of proposed reforms relating to residential leasehold properties.In a nutshell, it restricts ground rents in most new “regulated leases” to a peppercorn rent. Furthermore, landlords of regulated leases must not require their tenant to make a payment of a “prohibited rent”. The Act does not apply to “excluded leases”.

What are regulated leases and excluded leases?

• Regulated leases are leases or sub-leases of single flats or houses exceeding a term of 21 years, granted for a premium and completed on or after 30 June 2022 (unless granted pursuant to a contract[1] exchanged before that date)
• The definition includes retirement home leases[2] but these leases will not come within the scope of the Act until 1 April 2023, at the earliest
• Excluded leases are statutory lease extensions of houses or flats, business leases, home finance plan leases and community housing leases

What's a peppercorn rent?

• Technically, it's an annual rent of one peppercorn
• Practically speaking, it means that the financial value of ground rent in most new regulated leases will be zero

Is the rent for all regulated leases reduced to a peppercorn rent?

No, there are a few exceptions, including:

• Replacement leases: If a tenant of a lease entered into before 30 June 2022 (the original lease) is granted a new lease of some or all of the premises demised under the original lease, in certain circumstances, a ground rent in excess of one peppercorn per annum can be charged for, what would have been, the unexpired term of the original lease
• Shared ownership leases: Where the tenant's share is less than 100%, only a peppercorn rent can be charged in relation to the tenant's share of the property. A landlord can charge rent in respect of their share

What's a prohibited rent?

• Any rent exceeding the amounts referred to above
• That said, any amount reserved as rent in a lease that is in respect of rates, council tax, services, repairs, maintenance, insurance or other ancillary matters is not treated as prohibited rent

What about administration charges for collection of rent?

• No administration charge is payable for collecting any ground rent that is restricted to a peppercorn by the Act

What happens with partially completed residential leasehold developments?

• Some developers, mindful of what was on the cards, voluntarily moved to zero ground rent schemes a while ago
• Problems may well be encountered on partially sold schemes where developers have not adopted that strategy. They will have a mixture of ground rent arrangements to cope with as regulated leases will be the only option moving forward

But has the Act got teeth?Yes, to a certain extent!

• Trading standards authorities in England and Wales will be under a duty to enforce the Act
• As things stand, financial penalties for breaches by landlords (including former landlords) range between £500 and £30,000 per lease
• However, a landlord who commits multiple breaches in relation to the same lease is generally only liable to one financial penalty and a landlord who commits multiple breaches in relation to multiple leases may, also, only be liable to one financial penalty

So, what's next on the Government's leasehold reform roadmap?As evidenced in the Queens Speech 2022[3] the Government appears committed to transforming the residential long leasehold experience but it's fair to say that there's still a long way to go!

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If you'd like to discuss anything in this article, please contact the Core Residential Team for the purpose of this newsletter page only:[table id=50 /]

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[1] Other than an option or right of first refusal[2] One requiring the occupant(s) to have attained a minimum age of not less than 55 (section 25(5); Leasehold Reform (Ground Rent) Act 2022)[3] See, in particular, pages 69 - 70; Queen's Speech 2022: background briefing notes