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The end of ground rents for the leasehold market?

Posted: 31/08/2017

‘Tackling unfair practices in the leasehold market’ is the bold title of a consultation paper issued by the Government on 26 July 2017. This follows on the heels of the housing white paper published earlier this year entitled ‘Fixing our broken housing market’.

The consultation paper identifies four areas which the Government wishes to tackle:

  • new build leasehold houses;
  • escalating and onerous ground rents;
  • ‘ground 8’ possession orders; and
  • giving freeholders the same rights to challenge service charges on an estate as leaseholders.

The consultation paper also asks for help to identify areas for future leasehold reform.

New build leasehold houses

The Government believes that developers are deliberately creating leasehold houses (when there is no need to do so) in order to create a future income stream for the developer through ground rent and premiums charged to provide consent when the terms of the lease are restrictive.

Although there are a few situations when leasehold houses are appropriate (such as when dealing with National Trust land), the Government believes there really is no need to create them.

The Government estimates that out of 4 million leasehold properties in England, there are 1.2 million leasehold houses. They are much more common now than in the past. The total number of leasehold properties being registered as new build completions currently represents approximately 43%. In 1996 the same proportion was only 22%.

It is certainly clear from our experience that developers are seeking to exploit the current system. It is also apparent that some leaseholders did not realise the problems they would face by acquiring a leasehold house and the consequent cost of acquiring the freehold from their landlords under the enfranchisement legislation.

Although some developers such as Taylor Wimpey have set aside money (£130 million) to help customers affected by this so called "leasehold scandal", a considerable number of leaseholders are left with no recourse to their developer. They may have a claim against their conveyancer for failing to advise them properly, although it remains to be seen whether leaseholders will pursue such claims. No doubt this will be a fertile source of work for litigators in the future.

The consultation paper asks whether there should be a limit on the amount by which ground rents can increase and whether this should be pegged to inflation or to a proportion of the open market value of the property. Alternatively, the consultation asks if ground rents should effectively be abolished by limiting ground rents in new leases to a peppercorn. There is precedent for such limits being placed as there is currently a fixed amount of £10 per year for ground rents when leaseholders exercise the Right to Buy.

The consultation paper also asks what help can be given to existing leaseholders with the onerous ground rents.

Exemption from ground 8 possession orders

An unintended and unfair consequence of increasing levels of ground rent is that if they exceed £1,000 per year in Greater London or £250 per year elsewhere in England the leases are classed as short tenancies under the Housing Act 1988. This means that the landlord can seek to end the occupancy of the home owner and attempt to evict the tenant using the ground 8 procedure. The Government seeks to correct this.

Challenging the reasonableness of service charges/estate charges

At present only leaseholders of flats have the ability to challenge charges. The Government seeks views on whether this right should be extended to include owners of houses on an estate where they are obliged to pay for the maintenance of communal areas and facilities such as private roads and electric gates.

The future

The Government plans to consult on:

  • improving commonhold (which has never taken off despite being the model used in most other countries);
  • how managing agents operate; and
  • whether there should be improvements to enfranchisement legislation.

Given the public outcry over escalating ground rents it is clear that the government will press ahead with some kind of reform. It is highly likely it will seek to abolish or severely curtail escalating ground rents for new houses/flats. We doubt, however, that there will be any change to existing houses and apartments; investors currently holding these types of investments should be quite safe. Ground rents are an important asset class for some of the biggest investment firms in the City; Schroders, Old Mutual and Investec are among the backers of the 'Ground Rents Income Fund' that make money from buying up ground rents.

The Government will need to strike a delicate balance; one that protects consumers from capricious developers but which also ensures new housing is delivered. The solution settled upon must be palatable to developers; the Government cannot afford for developers to scale back the release of new housing nor will it want developers to increase house prices to compensate for the loss of income from the abolition of ground rents.

The consultation closes on 19 September 2017.

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