Brady Solicitors were recently instructed by a management company client faced with a leaseholder requesting a lease variation, which they were uncertain on how to respond to. The leaseholder proposed amending the ground rent terms so that future increases were linked to the Retail Prices Index (RPI), rather than the existing clause which provides for the ground rent to double every 15 years until the 75th year of the term.
Whilst being open to the variation, the directors of the management company sought expert advice from a leasehold property specialist on how to respond to the request. They raised several questions around the legal, practical, and reputational implications of potentially agreeing to such a variation.
The Client’s Challenge
The client wanted to understand:
- Whether legislation required them to agree to a cap on ground rent, or whether they could refuse the request altogether.
- Why the existing doubling clause was considered “unreasonable” compared to an RPI-based increase.
- If they agreed to the deed of variation, whether this would need to be offered to other leaseholders in the block.
- Whether the decision could be made by the directors or required shareholder approval.
The directors were also concerned about the practicalities of potentially having one leaseholder on a different agreement to others, and the risk that other leaseholders might object if the variation was perceived as unfair.
Brady’s Advice
Whilst the management company did not ask any questions in relation to the Leasehold Reform Act 2022, the advice centred on the current and forthcoming legislative position on ground rents. Whilst the Leasehold Reform (Ground Rent) Act 2022 has introduced a ban on ground rents of more than a peppercorn per year for new leases, this does not yet apply to existing leases. However, Government announcements suggest that reforms abolishing ground rents on existing leases could be in force by 2026, with a draft Leasehold and Commonhold Reform Bill expected later this year to clarify the government’s final position.
Given that the proposed RPI variation was requested to take effect from 2032, it is quite likely that ground rent could be abolished before then. In that scenario, the variation would be redundant and could potentially leave the management company open to criticism if it had agreed to a change in terms shortly before legislation abolished ground rents altogether.
Further advice stated that while an RPI-linked increase could benefit a freeholder or management company that collects ground rent by providing a steady income stream, if the management company has no role in administering or collecting ground rent, the financial impact would be negligible.
Finally, we highlighted that escalating ground rents can make leasehold properties more difficult to sell or mortgage. Even where the management company is not a direct beneficiary of the ground rent, it could lead to leaseholder dissatisfaction and reputational issues if variations are perceived as unfair or unnecessarily complex.
Outcome
Ultimately, the advice given to the management company was to take no immediate action on the request. With significant reforms expected within the next 12 to 18 months, the conclusion was that it was prudent to wait until the government’s draft bill is published before considering any lease variations relating to ground rent.
This approach protects the management company from the risk of entering into agreements that may soon be overridden by legislation, while also avoiding the possibility of creating tension with other leaseholders in the block and adding unnecessary confusion to the collection of ground rent payments.
Conclusion
This case highlights the importance for management companies seeking up-to-date, expert legal advice before agreeing to lease variations, particularly in areas subject to reform. With the government committed to abolishing ground rents, managing agents and directors should proceed with caution when faced with leaseholder requests for variations and should carefully weigh up both the legal and practical consequences. Instructing a specialist leasehold solicitor can help ensure any decisions made are based upon a solid understanding of current legislations, as well as potential implications of the decision being made.
