Proposed Leasehold Reforms Signal Promising Changes for Intermediate Landlords

At present, intermediate landlords have limited influence over the terms of a lease extension for an underlet property, even where their own head lease carries a  ground rent liability.

The under tenant negotiates directly with the competent landlord and, although the intermediate landlord may have independent representation, their ability to challenge  either the premium or the share allocated to them is extremely restricted. In many cases, the premium they receive does not cover their ongoing obligation to pay ground rent under the head lease, even if that premium is invested.

In some situations the competent landlord and the intermediate landlord may agree to vary the head lease so that the ground rent is reduced by the amount that would have been payable under the underlease (which has now been extended at a capped or peppercorn ground rent). However, there is no requirement for the competent landlord to agree to such an adjustment. 

This creates a real risk of shortfall between the rent received from underleases (and any invested premiums), and the amount of ground rent payable under the head lease.

The proposed reforms seek to resolve this imbalance. Where an under tenant secures a reduced rent lease extension, the ground rent under the immediately superior head lease will be reduced by the same amount. This preserves the financial equilibrium, ensuring that what goes out in ground rent aligns with what comes in. 

Note, however, that if the under lease ground rent is subsequently increased, the head lease ground rent will increase in line with this. Ongoing vigilance will be required to ensure ground rent information is accurate and regularly reviewed.

We will be keeping a close watch on the proposed reforms, commenting in the coming months on any changes or details released concerning when the reforms may receive Royal Assent and the dates upon which the provisions come into force. 

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