"The cap would represent a significant loss of income for many freeholders and, I believe, an attack on their legitimate property interests. Furthermore, the ground rents of many of these leases will not increase for another 20, 25 or 33 years and future income would be further eroded by inflation"
- Clive Scrivener - Scrivener Tibbatts Ltd
The new government, in a new Leasehold and Commonhold Reform Bill to be published shortly, has committed to, ‘Tackling unregulated and unaffordable ground rents’. While the details of the Bill are not yet known, it seems likely that, whether through existing (the Leasehold and Freehold Reform Act 2024) or new legislation, ground rents will be capped at £250 per annum, if not a lower figure (‘a peppercorn’ being the industry’s expression).
The cap would represent a significant loss of income for many freeholders and, I believe, an attack on their legitimate property interests. Furthermore, the ground rents of many of these leases will not increase for another 20, 25 or 33 years and future income would be further eroded by inflation.
It is not just the freeholder that might be affected, it is also many shareholders and/or stakeholders who have an interest in the freehold company. Many of these will be residential leaseholders who are directors of the freehold management company which collects ground rent from leaseholders on their estates. This could leave many residential leasehold management companies with a budget deficit and a hole in their balance sheets which no doubt the leaseholders themselves would have to fill.
An example is Lewis Rolfe Audburn Ltd. His stakeholders and investors will be impacted as their long-term income streams will be significantly reduced, and the capital value of his portfolio will also be significantly reduced.
The loss of this ground rent income could mean that companies like Lewis’ cannot afford to pay their staff and/or their creditors. This could also create a huge problem for leaseholders whose freeholder has gone bust and the freehold interest becomes bona vacantia (the responsibility of the Crown). In these circumstances, the legal fees to obtain possession of the freehold could cost leaseholders significantly.
Audburn owns in excess of 500 flats and its ground rent roll is estimated to be £850,000 per annum. Were the ground rents capped at £250, the income would reduce by approximately 50-70%.
Since 1982, Albur has been investing in good faith in the residential freehold sector. In my view, it is these professional freeholders that the government should be encouraging into the residential market to manage and invest properly into residential property which ultimately will be to the benefit of residential leaseholders and housing supply.
Albur mentions that much of the work on its 41 residential blocks is carried out by the freeholder and is unseen and not necessarily directly paid for via the management fee. Although the ground rent is not specifically linked to a particular service, it is a fair incentive for a freehold owner to efficiently manage and maintain their property so as to encourage
leaseholders to pay their rent on time. It is this fixed-income stream that these types of investors are looking for.
The management fee that is payable by the service charge is generally used to pay staff to professionally manage the block. This would still be required in the future and is a cost that could not be reduced. If anything, this management cost may increase as many professional freeholders who are now unable to collect future ground rents would simply leave the market or their management fees would have to significantly increase if they are forced to employ third-party managing agents.
Lewis Rolfe’s final comments to us were that his company had acted correctly, in accordance with the law, and was encouraged to purchase perfectly legal assets with the price effectively set (although still negotiable) through previous legislation under the 1967 and 1993 Leasehold Reform Acts.
If caps on ground rents were to be introduced, Lewis’ business would face collapse which would have a huge impact on him, his investors and therefore the leaseholders who live within his blocks.
There are many freeholders like Lewis, some significantly larger but many much smaller, who will face the same problems if a cap on ground rents is introduced.
It is my view that the biggest beneficiaries from this possible legislation will be wealthy leasehold flat owners, primarily within the southeast of England and London, who will benefit from a much-reduced ground rent on their potentially multi-million pound flat and any other properties they may own as Buy to Let landlords.
The Leasehold and Freehold Reform Act was rushed through Parliament in the “wash up” before the general election and lacked sufficient time for debate.
Freeholders including Lewis Rolfe are waiting anxiously to find out what the new Labour Government will do: will it bring through the secondary legislation to bring about a ground rents cap as part of the Leasehold and Freehold Reform Bill Act 2024? Or look to do something even more drastic as part of its own Leasehold and Commonhold Reform Bill?
The biggest questions for practitioners, freeholders and leaseholders are how any new legislation will work in practice and who will pay the compensation to the freeholders for the loss of their legitimate property interests. Sadly for Lewis Rolfe and others, any suggestion that the government will pay seems unlikely.
