"Ground rents currently provide a large source of stable income to not only investors but also pension funds and there is the potential if there were to be a sudden, dramatic and wide-sweeping change for there to be knock-on effects in that part of the financial markets that seek out fixed or stable income"
- Mark Chick - ALEP
As part of its wider leasehold reforms, the government is currently running a consultation on Modern leasehold: restricting ground rent for existing leases. The consultation seeks views on limiting the ground rents that leaseholders are required to pay.
ALEP is a professional body representing over 1,200 solicitors, barristers and surveyors who work in leasehold enfranchisement and have experience dealing with ground rents from a variety of perspectives. In a recent survey, 81.8% of members agreed with the statement that ‘residential ground rents can have a negative or undesirable impact on the sale of leasehold properties’, while just 18.2% disagreed.
ALEP’s consultation, mirroring the government’s, considered the potential negative impacts of ground rents and how they can be mitigated.
70% said that some ground rents could cause problems in when selling a property and 43.2% said that problems occurred because the full terms related to ground rent payments had not been made clear when the vendor purchased the property.
The consultation went on to identify which of the government’s proposals to rectify the issue were most appropriate. Members determined that the best potential solutions are capping ground rent at a percentage of the property value (favoured by 38.6%), capping ground rent at an absolute value (27.3%) or capping ground rents at a peppercorn (20.5%).
Of these options, the government’s stated preference is to cap ground rent at a peppercorn. ALEP members believed that this would very significantly benefit all leaseholders. The of this impact would be disproportionately harsh on freeholders and investors who would experience an extremely negative impact.
Respondents considered the potential impact on various groups: freeholders/intermediate landlords, investors (including local authorities pension funds and others), leaseholders, mortgage lenders, and the wider property market (developers conveyancers estate agents etc.).
Mark Chick, Director of ALEP, explains: “Ground rents currently provide a large source of stable income to not only investors but also pension funds and there is the potential if there were to be a sudden, dramatic and wide-sweeping change for there to be knock-on effects in that part of the financial markets that seek out fixed or stable income.
“There is a significant difference between capping ground rent at a percentage of the property value and capping ground rents at a peppercorn and so it is no surprise that ALEP members, concerned about the knock-on impact on the wider economy, favour the former.”
Given the potential financial damage that might be incurred by freeholders, it is unsurprising that 75% of ALEP members believe that if a ground rent cap was introduced, compensation should be paid to freeholders and/or intermediate landlords.
Were ground rents to be capped at an absolute value and taking into account all those impacted, the common preference among ALEP members (at 15.9%) was a value of £201-300, with 11.4% proposing a value of £101-200 and 11.4%, £401-500.
Alternatively, if the government were to pursue the option of capping ground rent at a percentage of the property value, a significant majority of members (45.5%) believe that 0.1% of the property value was most appropriate.
As part of its consultation, the government asked for views on the most appropriate mechanisms for increasing ground rents.
On this issue, a clear majority of ALEP members (47.7%) stated that ground rents should increase by a pre-determined index link, such as the Retail Price Index (RPI).
Just over a quarter of members (27.3%) said that ground rents should not increase again after a cap is introduced although a significant proportion (22.7%) said that ground rents should increase in line with the market and 13.6% felt that ground rents should increase by a fixed increments.
Despite broadly supporting the proposal, ALEP members felt that there should be exemptions to ground rents being capped.
Each of the potential exemptions listed in the government’s consultation gained considerable support:
- Leases that are for home reversion plans or ‘rent to buy’ arrangements that rely upon rent to operate as a route to purchase a home (70.5%)
- Business leases as defined by the Leasehold Reform (Ground Rent) Act 2022. (70.5%)
- A long residential lease where the current freeholder or intermediate landlord can prove they have negotiated an agreement resulting in the current leaseholder not having to pay a premium (61.4%)
- Where a lease has been granted for fewer than 21 years in length (56.8%)
- Where leases are for community-led housing: where it is a community housing lease (where the landlord is a community land trust) or it is in a building controlled or managed by a cooperative society (43.2%)
Commenting on ALEP’s consultation response, Mark Chick said: “It is encouraging to see that our members largely support the government’s proposals for changes to ground rents.
"However, our members’ answers have to be seen very much in the light of the way in which the questions posed by the ground rent consultation have been phrased. These are all very much focused on a single objective, namely, is capping, restricting, or abolishing all ground rents.
"When considering the width of options available to the government for reform in this area, one thing that our members might also wish to raise is the question of whether any reform or restriction could potentially be addressed at only the ‘problem’ ground rents (those doubling at intervals of less than 20 years, or where the level will become ‘onerous’ in a short timescale.
"The work done with the Leasehold Reform Ground Rent Act 2022 shows that it is possible to draft quite precisely and cleanly to deal with ground rents for new leases. Legislation to seek to restrict or remove rents in existing leases (which may have been running for a good number of years) may run the risk of being disproportionate to the wider objective of discouraging ground rent and ultimately, leasehold as a form of land tenure.
"What seems clear is that the proposals outlined in the ground rent consultation will need to be discussed in further detail and will require further work before progressing to legislation. It seems clear from what we have seen so far that a ground rent cap probably cannot apply in all circumstances.
"Indeed we have a clue in the draft Leasehold and Freehold Reform Bill and the proposed changes to the valuation mechanism that when calculating the ‘term value’ the value of any ground rent received is to be treated as being paid at 0.1% of the capital value of the property regardless of the level at which it is in fact paid. This does tend to suggest the direction of the government’s thinking on this.”
“It is very clear from the feedback that we received, that where serious issues have arisen, it is invariably the result of a lack of professional advice when purchasing a leasehold property. ALEP has worked constantly to seek to raise public awareness of these issues and to recommend to anyone buying a leasehold property to seek appropriate professional advice to ensure peace of mind and avoid unexpected costs.
"As has been well documented, many of the worst issues relating to ground rents that flat owners have become subject to have arisen as a result of what might be termed an ‘advice failure'.”
