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GROUND RENTS BILL

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EXPLANATORY AND FINANCIAL MEMORANDUM

    INTRODUCTION

  1. This Explanatory and Financial Memorandum relates to the Ground Rents Bill. It has been prepared by the Department of Finance and Personnel in order to assist the reader in understanding the Bill and to help inform debate upon it. It does not form part of the Bill and has not been endorsed by the Assembly.

  2. The Memorandum needs to be read in conjunction with the Bill. It does not, and is not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause or Schedule does not seem to require any explanation or comment, none is given.

  3. In this instance, the Memorandum serves also as a policy Memorandum because the legislative timetable shows the same date for submission of both documents.

    4. BACKGROUND AND POLICY OBJECTIVES

    Background to the proposals

  4. The Ground Rents Bill is intended to replace Part II of the Property (Northern Ireland) Order 1997. Part II of the 1997 Order contained a complex and costly scheme for the redemption of ground rents on residential property in Northern Ireland. That scheme has not yet been brought into operation. It is intended to replace that complex and costly scheme with the more streamlined ground rent redemption procedure contained in the Ground Rents Bill.

    5. Purpose of the Bill and summary of its main provisions

  5. The ground rent redemption scheme has as its primary objective the simplification of the conveyancing process in Northern Ireland. It aims to achieve this by creating the right for owners of residential property subject to an annual ground rent to enlarge their leasehold estate in the land into a fee simple or freehold title. Upon redemption of the ground rent the property owner will no longer have to pay an annual ground rent to the rent-owner. This part of the scheme is known as voluntary redemption and is dealt with by clause 1. The owner of the ground rent (that is the person entitled to receive the annual ground rent) will not be able to object to the rent-payer redeeming the ground rent. However, the Ground Rents Bill does make provision for the rent-owner to receive compensation to reflect the loss of his future entitlement to the annual ground rent on the property concerned. The amount of the compensation payable will be known as the "redemption money". It is expected that the voluntary redemption scheme will be commenced as soon as possible after the Bill has completed all its stages in the Assembly.

  6. The Ground Rents Bill also makes provision for the compulsory redemption of the ground rent on residential property in defined circumstances (clause 2). The Bill provides that when a person buys a house he or she will have to redeem the ground rent on the property before his or her new title will be registered by the Land Registry. The compulsory ground rent redemption scheme will apply both to existing unregistered residential property as well as registered residential property. As with the voluntary redemption scheme, the rent-owner will receive compensation from the purchaser of the property to reflect the loss of future entitlement to payments of the annual ground rent on the property. Again, as with the voluntary scheme, the rent-owner will not be able to object to the redemption of the ground rent.

  7. The most important policy aim of the Ground Rents Bill is the introduction of a scheme for the compulsory redemption of ground rents on residential property. It is envisaged that the compulsory redemption scheme will be introduced in two phases. First, compulsory redemption of a ground rent will apply to the purchase of existing unregistered residential property. The introduction of this phase of the compulsory element will be tied to the extension of compulsory first registration (CFR) of existing unregistered land in Northern Ireland, and is likely to occur sometime in 2001. The commencement of compulsory redemption of the ground rent on registered residential property in Northern Ireland will follow some time after that, probably 2003. The aim of phasing in the two elements of the compulsory scheme is minimise the financial and staffing impact on the Land Registry and to allow Land Registry to familiarise themselves with new procedures and ensure that the scheme operates as it is intended.

  8. A central feature relating to the fairness of both the voluntary and compulsory ground rent redemption procedures is the adequate payment of compensation to rent-owners who, upon redemption, will lose their future entitlement to the annual ground rent on property currently held by them. The compensation payable will be calculated by multiplying the amount of the annual ground rent by a fixed number of years to give the amount of the redemption money payable to the rent-owner. Provision is made in Schedule 1 to the Bill for the Department of Finance and Personnel to fix the multiplier by Order subject to negative resolution by the Assembly. Different multipliers may be set for different categories of ground rent.

    9. CONSULTATION

  9. This Ground Rents Bill is intended to replace the ground rent redemption scheme contained in Part II of the Property (Northern Ireland) Order 1997. This new Bill does not fundamentally change the policy objectives and aims of Part II of the 1997 Order, but rather is intended to simplify the redemption process.

  10. The Property (Northern Ireland) Order 1997 was made on 8 April 1997. A draft Order in Council and Explanatory document had been published in June 1996 and circulated to a wide number of bodies and individuals in Northern Ireland seeking views on the draft Order in Council. Some twenty organisations and individuals commented, most of whom were generally content with the thrust of the proposals. The provisions of the Property (Northern Ireland) Order except those relating to ground rent redemption and Article 35 are now in force.

  11. After the 1997 Order was made, representations were made to the Department of Finance and Personnel that Part II of the 1997 Order dealing with ground rents should not be introduced in its present form. It was suggested that the scheme for both voluntary and compulsory redemption in the 1997 Order, while workable, would be costly to administer from the point of view of both those wishing to redeem a ground rent voluntarily, those compelled to redeem a ground rent, and the Land Registry in administering the scheme

  12. As a result of these representations the Department of Finance and Personnel decided to look again at the original redemption scheme to see if a redemption scheme could be devised which would be easier to administer and which would reduce the costs associated with the redemption procedure. Following detailed discussion with members of the Law Society for Northern Ireland a new redemption procedure was devised. Both the Department and the Law Society were greatly assisted in this work by retaining the services of an eminent land law academic. This new scheme was put to a number of the professional organisations involved in the conveyancing process as well as the General Consumer Council for Northern Ireland in June 1999. The response to this limited consultation was favourable and the Department decided to proceed with the new ground rent redemption scheme. As the new scheme did not alter fundamentally the policy of the original scheme, the Department decided that there was no need for wider public consultation.

    13. OPTIONS CONSIDERED

  13. This exercise involved examining the original ground rent redemption scheme contained in Part II of the Property (Northern Ireland) Order 1997 and identifying which elements of the redemption procedure were likely to prove unworkable or too costly in practice. It had already been agreed by the Department and all interested bodies that there was no requirement to review the underlying policy objectives and aim of the redemption procedure which was to simplify the conveyancing process in the long term.

    14. Cumbersome notice procedure

  14. The core change, therefore. to the original scheme was to abandon that part of the redemption process which permitted the rent-owner to be involved in the redemption process through his serving counter-notice to the rent-payer wishing to redeem. The counter-notice, described in representations to the Department as a cumbersome procedure, required the concurrence of those superior rent-owners, if any, who would be entitled to a share in any redemption money (compensation) payable to the immediate rent-owner. This notice procedure required the redeeming rent-payer to pay all the costs and expenses of the rent-owner and superior rent-owners. This would have resulted in costs and expenses exceeding the redemption money payable by the rent-payer. On reflection, we considered that retaining this provision would deter many home-owners from using the voluntary redemption procedure.

    15. Pre-sale redemption procedure

  15. As Part II of the 1997 Order was drafted, the introduction of the compulsory redemption of ground rents would require the vendor to redeem the ground rent prior to the completion of the sale of the property. On reflection, this may have led to the risk of conveyancing transactions being delayed or nullified if the rent-owner proved to be obstructive or uncooperative. The new scheme in the Ground Rents Bill now provides that before the new owner's title to the property can be registered the purchaser of the property must redeem the ground rent. Only once the Registrar of Titles is satisfied that the ground rent has been redeemed will he permit the purchaser's newly acquired interest in the property to be registered with the Land Registry.

    16. OVERVIEW

  16. The Bill has 33 clauses and 3 Schedules. The Bill is concerned exclusively with the redemption of ground rents on residential property in Northern Ireland. Commercial property has been excluded from the scope of the redemption scheme as commercial conveyancing in Northern Ireland traditionally has not involved the same degree of complex pyramid title to property which is a feature of residential conveyancing, especially in the Greater Belfast area and other towns in Northern Ireland.

    17. COMMENTARY ON CLAUSES

    Clause 1: Power of certain rent-payers to redeem ground rent

    Subsection (1) provides a rent-payer with power to redeem the ground rent on residential property in accordance with the provisions of the Bill.

    Subsections (2) and (3) limit the power to redeem the ground rent to residential property in Northern Ireland and excludes commercial property. Commercial property is defined as land used wholly for business purposes, although the fact that part of the land is used by a person as his residence in consequence of his or her employment does not prevent the property still being regarded as used wholly for business purposes.

    Subsection (3) provides that building leases are not excluded from the redemption scheme in clause 1.

    Clause 2: Compulsory redemption in case of dwelling-house

    Subsection (1) provides for the compulsory redemption of a ground rent on unregistered residential property.

    Subsection (2) provides for the compulsory redemption of a ground rent on registered residential property.

    Clause 3: Exceptions to, or restrictions on, clauses 1 and 2

    Subsections (1) - (6) exclude from both the voluntary and compulsory redemption scheme particular types of estate in land. They also make special provision in relation to leases of agricultural land and in cases where the rent-owner or superior rent-owner is the National Trust.

    Subsections (7) and (8) provide that flats shall be excluded form both the voluntary and compulsory redemption procedures. This is because with flat developments there are other complex considerations relating to ownership of the common parts such as stairways, utility rooms, gardens etc.

    Clause 4: Redemption

    This clause sets out the procedure for redeeming the ground rent on residential property in Northern Ireland. It is a procedure which applies equally to the voluntary and compulsory redemption processes. The redemption procedure will commence with an application to the Land Registry accompanied by various payments and other documents. Immediately after the rent-payer has made his application to the Land Registry he shall serve notice on the rent-owner (if known) that he has done so.

    Clause 5: The redemption money

    This clause provides for the calculation of the redemption money payable by the rent-payer to the Land Registry and for the keeping of a register of redemption moneys by the Land Registry. The redemption money is the sum produced by multiplying the annual ground rent by a fixed number of years. Other payments necessary before the redemption of a ground rent can take place are also specified.

    Clause 6: Disposal of redemption money

    This clause sets out the basis for dealing with claims in respect of redemption and other moneys lodged with the Registrar of Titles under clause 4 of the Bill. The Registrar shall only pay out the redemption moneys if satisfied that the person who has made the claim to them is actually entitled to the money. In the vast majority of cases the person claiming the redemption moneys will be the immediate rent-owner. However, in certain prescribed cases a superior rent-owner may be entitled to claim the redemption money. The person to whom the redemption moneys are paid out will sometimes not be entitled to all of that money. Where this is the case the person to whom the money is paid shall agree to pay out to other rent-owners their respective shares of the money lodged with the Land Registry as part of the redemption process. Provision is made in clause 23 for appeals to the Lands Tribunal against any decision of the Registrar in respect of entitlement to claim the redemption moneys.

    Clause 7: Certificate of redemption

    This clause provides that the date on which the ground rent has been redeemed is the date on which the Registrar shall seal the Certificate of Redemption, which he shall forward to the rent-payer.

    Clause 8: Exclusion of re-possession of land while redemption is pending

    The purpose of this clause is to protect the occupation rights of a rent-payer in the period between his or her application to the Land Registry commencing the redemption procedure and the sealing of the Certificate of Redemption by the Registrar which completes the redemption procedure. The need for such a provision arises as there may be some delay between the lodging of the rent-payer's initial application and the sealing of the Certificate by the Registrar. This delay could arise, for instance, where all the appropriate documents had not been lodged with the rent-payer's application.

    Clause 9: Application of certain provisions of Act to certain other periodic payments

    This clause applies provisions of the Bill to other types of periodic payments which are not ground rents.

    Clause 10: Effect of certificate of redemption

    This clause sets out the effect of the Certificate of Redemption and in particular permits cancellation of the certificate where it has been obtained by fraud.

    Clause 11: Superior rents

    The main effect of this clause is to provide that the redemption of a ground rent under clauses 1 or 2 of this Bill has the effect of redeeming all superior rents to which the land is subject. In many instances, especially as regards older residential property in Belfast, the ground rent which is being redeemed may have an immediate rent-owner and several superior rent-owners.

    Clause 12: Land in separate occupation subject to a single ground rent

    This clause deals with a not infrequent case where perhaps two or three adjoining terraced houses are subject to a single ground rent but the houses are occupied by different individuals. It permits the rent-payer occupier of one of the houses to redeem the ground rent for all the properties if the various occupiers do not decide jointly to redeem the rent under clause 4(6). Other provisions of this clause permit the Registrar to issue a copy of the Certificate of Redemption to a rent-payer occupier of one of the properties even though that person did not redeem the rent. However, provision is made that the Certificate shall not be issued unless the non-redeeming rent-payer has paid any outstanding moneys and his or her share in the costs of the redemption to the person who did redeem the ground rent.

    Clause 13: Effect of redemption on titles

    This clause sets out the effect of the redemption of a ground rent on the titles of the rent-payer, the rent-owner and any superior rent-owners. The clause deals separately with land held in fee simple subject to a ground rent and leasehold land subject to a ground rent. It also sets out the effect of the sealing of the Certificate of Redemption on unregistered land and registered land.

    Clause 14: Continuance of rights and equities affecting leasehold land

    This clause applies where the redemption of a ground rent on a leasehold estate has the effect of enlarging it into a fee simple. In such cases all the equities that affected the former leasehold estate are preserved against the new freehold title by virtue of them being treated as a graft on the new freehold.

    Clause 15: Mortgages and leases

    This clause provides for the effect on mortgages and leases where a leasehold estate is enlarged by virtue of redemption of the ground rent. Whatever mortgage or lease was granted on the leasehold estate prior to redemption shall continue as if it were a mortgage or a lease of the enlarged estate after the redemption has taken effect.

    Clauses 16 - 17: Covenants and Enforceability of covenants

    These clauses identify which covenants affecting land survive the redemption of a ground rent and by and against whom such covenants are enforceable. As a general rule these clauses provide that covenants do not survive the redemption of the ground rent, and then list those covenants which do. In particular, these clauses preserve any covenants which were reciprocally enforceable between the rent-payer and neighbours in the context of a building scheme. Thus important covenants for quiet enjoyment, against causing nuisance or interfering with facilities that benefit neighbours are preserved despite the difference in title between the neighbours.

    Clause 18: Settled land

    The purpose of this clause is to make special provision for the application of the ground rent redemption scheme to settled land: that is land subject to a settlement which provides for successive interests in the land. Settlements are rarely created today but were common in the nineteenth century and many remain today. A typical example of a settlement would have been the case where, in his will, a substantial landowner leaves his property to his wife for the remainder of her life, but on her death the property passes to his eldest son. The wife benefits from ownership of the land during her life but cannot dispose of it.

    Clause 19: Cesser of Act of 1971 as to enlargement of leases to which this Act applies

    This clause prevents initiation of the procedure to enlarge a leasehold estate in land or fee farm grant under the Leasehold (Enlargement and Extension) Act (Northern Ireland) 1971 into a freehold estate if the land is subject to a ground rent which can be voluntarily redeemed under clause 1 of this Bill.

    Clause 20: Avoidance of certain agreements

    This clause renders void certain agreements which would deprive a rent-payer of the full benefit this Bill.

    Clause 21: Mental patients

    Where a rent-payer, rent-owner or superior rent-owner is incapable by reason of mental disorder of managing and administering his or her own affairs, this clause permits representation of that person's interests in any aspect of the ground rent redemption procedure by a person authorised or appointed by the High Court or by a person exercising representative powers under an enduring power of attorney.

    Clause 22: Service of documents

    This clause deals with the service of documents required under the Bill.

    Clause 23: Disputes

    This clause sets out the range of issues within the redemption process which may give rise to a dispute. Jurisdiction to deal with the dispute is given in the first instance to the Registrar of Titles and then ultimately to the Lands Tribunal.

    Clause 24: Offences

    This clause makes it a criminal offence to knowingly or recklessly make a false statement in any documents which must be made, served or lodged during the redemption process. The maximum fine applicable to this offence is level 4 which is currently set at £2,500.

    Clause 25: Civil remedy for misstatement

    This clause makes it possible for a person who has suffered loss as a result of a misstatement to claim damages in a civil action.

    Clause 26: Fees and rules

    This clause deals with the making of rules prescribing fees payable to the Land Registry. It also authorises the making of Land Registry rules to give effect to the Bill.

    Clauses 27-29: Interpretation

    These clauses provide definitions for the key words and phrases used throughout the Bill. They mirror, with minor differences, the interpretation Articles in the Property (Northern Ireland) Order 1997. Clause 28 provides the definition of ground rent: the definition excludes ground rents which are nominal which means either that the ground rent is a yearly sum of less than £1 or a peppercorn rent or rent of no other value. The practical effect of this is that a person who pays a ground rent of less than £1 cannot redeem the ground rent on his or her property using the redemption procedures contained in this Bill. However, Article 35 of the Property (Northern Ireland) Order 1997 (as amended by Schedule 2 to his Bill) permits the rent-payer of a rent of less than £1 to enlarge his or her title to the property into a freehold title by making a deed of declaration that the title has been enlarged into a freehold title. Clause 29 defines dwelling-house. The main effect of this is to exclude commercial premises from the redemption scheme.

    Clauses 30-33 and Schedules 1-3: Supplementary provisions

    These clauses and Schedules are of a technical nature.

    FINANCIAL EFFECTS OF THE BILL

  17. Most of the financial and staffing implications flowing from this Bill are for the Land Registry which is part of the Department of Finance and Personnel. The early introduction of voluntary redemption will have some cost implications. More significant financial and staffing issues will arise as and when the compulsory redemption of ground rents on residential property is commenced. The scheme will also increase the quasi-judicial functions of the Registrar of Titles and the work of the Lands Tribunal. The initial costs to the Land Registry in terms of manpower will be minimised by phasing in the compulsory redemption scheme, commencing with compulsory redemption of unregistered residential property to coincide with the extension of Compulsory First Registration to the whole of Northern Ireland. There is provision for Land Registry to charge fees to cover its administrative costs associated with the ground rent redemption scheme.

    18. IMPACT ON EMPLOYMENT AND COSTS TO BUSINESS

  18. No adverse impact on employment has been identified within the Bill. Any impact which the Bill might have on business would be minimal. The only businesses affected in any way would be those which own ground rents on residential property. Ground rents on commercial premises are excluded from the redemption scheme.

    19. IMPACT ON RELATIONS, CO-OPERATION OR COMMON ACTION ON A NORTH/SOUTH OR EAST/WEST BASIS

  19. No adverse impact is indicated. The effect of the Bill is confined to property in Northern Ireland only

    20. IMPACT ON TARGETING SOCIAL NEED

  20. No adverse impact. The Bill will facilitate the desire of many home-owners to acquire the freehold title to their property, clear of any ground rent.

    21. EFFECTS ON EQUAL OPPORTUNITY

  21. The impact of the Bill on equality of opportunity as between those groups listed in section 75 of the Northern Ireland Act 1998 has been considered. No adverse impact was identified.

    22. HUMAN RIGHTS ISSUES

  22. The Bill does touch on human rights issues. The Bill interferes with possession and peaceful enjoyment of property as guaranteed by Article 1 of the First Protocol to the European Convention on Human Rights. As regards voluntary redemption the Bill deprives a rent-owner of his right to receive annual ground rents. As regards the compulsory redemption scheme, the rights of the purchaser of property are interfered with to the extent that the purchaser's title to the property cannot be registered until the ground rent has been redeemed.

  23. It is thought, however, that the Bill nevertheless complies with Convention Rights on the grounds that:

    1. there will be adequate compensation paid to the rent-owner;

    2. the important social policy aim of cleaning up title to residential property justifies the interference with the rent-owner's entitlement to the ground rent;

    3. the conveyancing process will be simplified in the long term; and

    4. the costs associated with the sale and purchase of residential property will be simplified.

    LEGISLATIVE COMPETENCE

  24. The requirements of the Northern Ireland Act 1998 in relation to legislative competence have been considered. The provisions of the Bill have been scrutinised from the perspective of Community Law and compatibility with Convention Rights, in accordance with testing procedures set up within the Office of Law Reform. Any issues of concern arise in relation to Convention Rights and are discussed under the above heading.

  25. The Minister of Finance and Personnel has made the following statement under section 9 of the Northern Ireland Act 1998:

    26. "In my view the Ground Rents Bill would be within the legislative competence of the Northern Ireland Assembly".