Liam Spender is a Trustee of the Leasehold Knowledge Partnership. Personally affected by the cladding scandal, Liam is a Solicitor-Advocate and Senior Associate at Velitor Law practising commercial litigation and arbitration in the City of London. Views in this article are personal and do not constitute legal advice. Liam is unable to take individual cases or to give legal advice to individuals.
The Bill to ban the creation of new ground rents in England and Wales continues its progress through Parliament. The government suffered one defeat on an amendment proposed by the Liberal Democrats. The government saw off further attempts by Labour and the Liberal Democrats to amend the Bill.
Peers voted 243-238 to add a Liberal Democrat amendment to the Bill requiring landlords, on pain of a fine up to £30,000, to give leaseholders information about the ban on ground rents before granting any informal leasehold extension (results here: https://votes.parliament.uk/Votes/Lords/Division/2549)
Peers voted 256-245 to reject the Liberal Democrat’s second amendment requiring a government assessment of the impact of the new law after six months, including current ground rents and fire safety remediation paid by leaseholders under existing leaseholders.
Voting 243-219, peers rejected Labour’s attempt to add an amendment to require the government to publish draft legislation within 30 days of the new law passing explaining how it will extend the ground rents ban to existing leaseholders (results here: https://votes.parliament.uk/Votes/Lords/Division/2550).
Inevitably, the government will use its 83-strong Commons majority to overturn the Liberal Democrat amendment in the Commons, perhaps setting up a later round of ping-pong between Lords and Commons, as seen with the Fire Safety Act earlier this year.
The government bowed to cross-party pressure at earlier stages of the Bill, agreeing to increase the fines for landlords who continue to charge, or to receive, ground rents after the Bill comes into force. Following these changes, landlords breaching the new law will be fined a minimum of £500 and a maximum of £30,000, with separate arrangements for fines in Wales.
Whether these higher fines will be enough to persuade perennially cash-strapped local authorities to put significant resources into enforcement of the new law remains to be seen.
Peers considered a wide range of other technical amendments to the Bill, including on informal extension and an amendment that would exempt many urban developments from the ban on ground rents. Other amendments included amendments to adapt the new law so it will work in Wales.
Unfortunately, even after the amendments today, the Bill continues to suffer from a clear loophole that will allow service charges to be manipulated to recreate ground rents in a different form. The loophole persists despite the government’s amendments to the definition of “rent” in the Bill.
The Bill awaits its final stage in the Lords, Third Reading, which will now come in September. The Bill will then move down to the Commons for further consideration, perhaps becoming law in 2022.
The government promised today that it will bring the law into legal effect within 6 months of that date, so perhaps by mid-to-late 2022.
Glaring loophole continues …
Today the Lords agreed to an amendment to carve out service charges for insurance, maintenance and services from the definition of “rent” in the Bill. The Bill caps anything that is not “rent” at a peppercorn.
The government’s largely pro-freeholder amendment means that fixed or variable service charges found in many leases will not be reduced to a peppercorn under the new law.
While of some comfort to leaseholders, who have an interest in ensuring the common parts of properties are maintained properly through fair and proportionate service charges, this is a charge largely benefiting landlords.
The amendment was accompanied with many warm words that landlords should not attempt to charge for anything other than bona fide services of value to leaseholders.
The government doubtless intended these warms words as what lawyers would call a Pepper v. Hart statement, something courts may take into when deciding what a statute means if there is any doubt over the language later. Such statements are rarely, if ever, of any practical value in litigation revolving around the wording of our laws.
Unfortunately, even with the amendment proposed by the government and the warm words accompanying its introduction in the Lords, the law leaves open a clear path for freeholders to manipulate service charges to recreate ground rents in disguise.
Examples may include charges for overseeing a managing agent, for arranging insurance or for renting a car park space.
Such charges will be presented as bona fide charges for services of value to leaseholders. The inevitable result will be costly and avoidable litigation whilst these charges are challenged by leaseholders, assuming they are noticed at all.
The government has already been warned of the dangers of this at all previous Lords’ stages of debate, see the LKP reports here: https://www.leaseholdknowledge.com/make-sure-ground-rents-are-dead-and-buried-by-improving-the-leasehold-reform-ground-rent-bill/ and here: https://www.leaseholdknowledge.com/leasehold-reform-ground-rent-bill/
Failing to prevent this manipulation of service charges leaves open the prospect of charges akin to ground rent persisting long after this new law comes into force, rendering the Bill nothing more than a paper tiger, much like the Landlord and Tenant Act 1987.
The government’s failure to act on this central issue leaves leaseholders vulnerable to exploitation, with view viable avenues of challenge. And, perhaps as intended, public policy continuing to be bent out of shape in favour of property interests.
Danger of informal lease extensions persists
The Liberal Democrat peers, led by Lord Stunnell, noted the ongoing danger of informal lease extensions. The new law will allow, in cases where leases are extended informally, ground rents under existing leases to continue to for the life of the original lease, which may be 80 years or more.
Perversely, the new law may in fact result in more informal lease extensions being granted, as freeholders try to preserve a long tail of ground rents, thereby avoiding the ban contained in this new law.
The dangers of these informal extensions have been explained here by the late LKP Trustee, Louie Burns: https://www.leaseholdknowledge.com/advice/informal-lease-extensions-are-pure-poison/
Lord Greenhalgh, leading for the government, tried to head off the vote saying this was an issue for implementation of the Bill, promising better consumer information, work with the legal profession and better information for landlords to avoid the need for any amendments of the Bill in relation to informal lease extensions.
The Liberal Democrats, joined by Labour, forced a vote on the issue of whether leaseholders should be warned of the ban on ground rents and landlords fined for failing to comply. The Lords voted to add the amendment to the Bill, by 243 to 238.
Freeholder interests find a voice
Today also saw the first public full-throated attempt to protect freeholders’ interests in perpetuating ground rents. Landlords have been conspicuously absent from proceedings on the ground rents Bill, preferring to lobby behind the scenes. It is presumed their silence on ground rents is because they are saving their powder for a wide-ranging reform to leasehold and commonhold. The government promises those reforms will start their passage through Parliament sometime next Spring.
The Earl of Lytton, a chartered surveyor by profession and a hereditary peer, moved an amendment to exempt sites with more than 15 residential units let on long leases where there are “significant communal facilities” or where the landlord is a responsible person under the Fire Safety Order.
The Earl of Lytton argued that running such sites was expensive and, quoting from briefings received from ground rent investors and the retirement home sector, that ground rent income was necessary to meet the expenses of that work. This was a repeat of the familiar line that ground rent investors provide long-term stewardship of properties they own. The cladding and fire safety scandal have proven that this is anything but the case.
The Earl, sticking closely to the investors’ script, warned that without professional ground rent investors, the people living in complex buildings would not take on the responsibilities of managing such buildings. Without ground rents, the Earl warned that management would be left to disinterested amateurs, namely the people living in such buildings.
The Earl of Lytton pointed out that this work was likely to get significantly more expensive as a result of the recent Fire Safety Act, which brings the external walls of all buildings with two or more residential units in scope for an expensive fire safety risk assessment. The Earl acknowledged that the Building Safety Bill will heap further costs onto such buildings.
The Earl of Lytton’s amendment is misconceived. Nowhere else in the world allow a third party to take an income from people’s homes in the way leasehold allows in England. Elsewhere in the world, the only way to extract an income is to provide a service approved by people living in the building.
There is no evidence that buildings elsewhere in the world, managed by people who live in them, are any worse managed than buildings under England’s antiquated leasehold arrangements.
In England, in virtually all cases, these costs are already met by leaseholders via the service charge. In most modern tripartite leases, the Residents’ Management Company or embedded managing agent are appointed as responsible person under the Fire Safety Order, not the landlord.
In modern two-party leases, the maintenance covenants will inevitably allow the landlord to delegate its maintenance obligations to one or more agents, one of whom will be designated as the Responsible Person under the Fire Safety Order. Again, the costs of compliance will be passed on to leaseholders via the service charge.
The Earl did not push his amendments to a vote. Unfortunately, the Earl referred to the fact the ground rent investor interests, including the British Property Federation, continue to lobby the government for the rights of their investors. The Earl called on the government to heed that lobbying and to water down the Bill to enable the continuation of ground rents at complex sites.
Earl Lytton later in the same debate spoke in favour of the Liberal Democrat amendment to protect leaseholders and freeholders from the costs of remediating historic building safety and fire safety defects.
No help for current leaseholders
Former Conservative Lord Chancellor, Lord Mackay of Clashfern, proposed an amendment to give leaseholders the right to buy out ground rents in existing leases. That is not something proposed in the current Bill. The government promises that this reform will be made in a future stage of leasehold reform, which is promised next week.
Lord Mackay, noting his unsuccessful attempt to enact commonhold during his time as Lord Chancellor, argued that it was implicit in the abolition of ground rents that the current system failed many leaseholders. It is therefore only sensible to remove all unfair ground rent practices from the market.
Lord Mackay did not push his amendment to a vote but sounded a clear warning to the government that peers from all sides of the House, including the government’s own backbenchers, expect the government to deliver on its promises of comprehensive leasehold reform.
Whilst the Bill offers no firm action to help current leaseholders, Labour attempted to add an amendment requiring the government to produce draft legislation to protect existing leaseholders within 30 days of this law reaching the statute book puts the government under pressure.
Labour’s amendment was defeated by a vote of 243-219 this afternoon.
The Lords will return to consider the Bill for Third Reading in September, following the summer recess.
The bottom line
Ending ground rents cuts off the head of the snake of property interests that ensnares so much of government policy on land and housing. The Bill does not go far enough to stamp out ground rents for good.
The Bill continues to hold out the very real prospect of juicy fee-sized meals for the property interest snake. Those fee sized meals will come in the form of service charges expressed to be for bona fide services of value.
The government must choose whether the Bill will be effective in practice, or whether it will saddle leaseholders with yet another addition to the statute book made with good intentions but of no practical use.
Related posts:
Make sure ground rents are dead and buried by improving the Leasehold Reform (Ground Rent) Bill
The Leasehold Reform (Ground Rent) Bill: opportunities and challenges
Analysis of where next with the Leasehold Reform (Ground Rent) Bill
Time to tell MPs what you think about the Leasehold Reform (Ground Rent) Bill – and why it must not be nobbled
Sucking a lemon, the Leasehold Advisory Service notes the ground rent Act – which it did absolutely nothing to assist
Building Safety Bill: Made by officials. By themselves. Talking to themselves. Will the cogs turn?
In an informal lease extension why can it not be a requirement for the value of the ongoing ground rent to be capitalised using a defined discount rate set by the government – in that way the lessee can correctly evaluate whether the proposed lower premium and the future ground rent is worth departing from the statutory basis
Having a prescribed leaflet served on the lessee about the the ground rent ban prior to taking up a non statutory lease extension will I doubt be of much use –
Surely it will be the case that all right-thinking professional advisers acting responsibly will more than strongly advise leaseholders to avoid “informal lease extensions” at all costs. Like public servants, who have the public duty to do so, professional advisers will wish to uphold any new law unfailingly and at all times. And this must include advising leaseholders to extend existing leases on a formal basis only.
One of the tools the government wants to give lesses to help them extend their lease is the option to be able to keep the ground rent terms as they are and pay a lower premium
The opposition to reserving a ground rent in a lease extension for the remaining years of the original term seeks to take away that option.
If the value of the ground rent reserved is correctly calculated and disclosed to the lessee before they commit then it will enable the lessee to make an informed choice.
The root of the problem is this : ground rent terms were proposed by the developer when granting the lease and the value of that financial burden was not adequately considered at that time and therefore not correctly reflected in the premium the lessee paid – very large grounds rents do get spotted during the conveyance and the price paid for the property would be reflected in the premium paid – so a ground rent of £5000 per annum would not be onerous as the lease would probably pay a £100k less for the property
This is a failing to consider the financial burden a ground rent places on the property is in part down to the lessee and their financial advisors , it is also a failure of government not to see that there is an analogy with the Consumer Credit Act and seek to enlighten lessee of this financial burden, Finally there is also blame on those developers who seek to exploit that – there are apparently some 13000 lease were if the NPV of the rent had been disclosed at outset the lessee would not have taken up such terms
This failure can be corrected by having the NPV of the rent disclosed – its resolution is not achieved by simply banning retrospectively all existing ground rents as this is unfair on those who have behaved correctly in setting reasonable rents (which may be linked to the RPI ) or were considered carefully at the time the terms were agreed
It would be unfair on those who have placed reliance on the covenant by the lessee to pay this rent believing that English-contract law would be upheld
The danger with retrospective cancelling o ground rents without adequate compensation is that we undermine English contract law – this country is widely perceived throughout the world as a safe place to do business – cancelling rents on the basis that one party did not understand what the financial burden was despite being professionally represented would open the flood gates to all manner of claims to have contracts set aside or varied
The problem cases are being addressed by the CMA those which fall outside their remit are not problematic and should be left as they are
Lease extensions are often obtained by a leaseholder just before they sell a property. The seller and their advisers will not care about selling on a ground rent as it will be someone else’s problem in future. Their buyer will be presented with an extended lease with a ground rent and will probably accept it as long as the ground rent is not too onerous.
It would be better if ground rents were banned on informal lease extensions as well.
That will only increase the premium.
If a ground rent reserved is in the range of £200- £350, and it rises linked to the RPI it is somewhat bizarre that lenders and buyers believe it could mutate into the devil and cause the property to be un mortgageable and destroy tens of thousands of pounds of value.
Many buyers ( particularly BTL investors ) may prefer to reserve a rent as they will get tax relief against rental income, whereas a capital sum paid for the lease extension only attracts capital gains tax relief on the eventual sale.
In the US commercial world, ground rents are seen as part of the funding of a purchase, where buyers often push for a higher ground rent in return for a lower acquisition price. The ground rent being lower than the interest that would have been paid on the discount. T
In these deals the buyer, the vendor and the landlord are all professionally represented and negotiate the rent and understand exactly what they are taking on and the prices of course reflect the rent negotiated
It’s not just the level of ground rent that is the problem, it’s all the other combined evils that come with ground rents and the lack of ownership of their freeholds by leaseholders.
Everyone with a reasonable knowledge of the property market knows what these ground rent landlords get up to. The opposition parties should have done more to curb them when they were in power. It would be fascinating to find out exactly how the lobbying process watered down past efforts at reform.
I am assuming that The Earl Lytton was speaking because of his vast amount of expereince and knowledge with block management and agents, not about the poor leaseholders being held to ransom by greedy freeholders. His comments at the very least shows a total lack of empathy and are insulting and whilst people in his position are given lip service, despite the fact, they simply just do not understand the lessees plight, makes all of us who are ethical in this business, realize why leasehold is in the mess it is in. I can only deduce that he does not live in a flat, with huge ground rents, waking watch, cladding and a freeholder, so far removed. they are just sitting biding their time ready for the next moneymaking scam to fleece leaseholders. Shame on you.
What would be the consequence when this bill becomes law if the price of the property is £250k but is sold for £240k in return for a “interest rent” of £350
The rent is not for “no service” – it is in return for something tangible – it is clearly set out in the lease and the lessee gets something in return ie a reduction of £10,000- we will assume that the paperwork and in the run up to signing the lease the same standards are required as they would be under the consumer credit act
Importantly the lease would always have the choice of either paying. £250k with no such rent or £240k with such a rent
“Importantly the LESSEE would always have the choice of either paying 250k with no such rent or 240k with such a rent”.
Or the prospective buyer can insist on paying 240k for a FREEHOLD purchase without, of course, ground rent. You might respond but that is not fair. The seller always has the right to reject the prospective buyer’s proposition, which no doubt he would. We would all then be living in tents, and free of you twats.
In our free market economy it is up to the lessee to formulate an offer – If he offers £240 k without a ground rent it is up to the developer to either accept or reject – the developer will not see it is unfair as it is part and parcel of adults acting in a commercial world
Typing out rude words from behind a keyboard does nothing to advance your viewpoint or improve the quality of the debate on this forum . Liam has taken the trouble to write an informative article which whilst I disagree with aspects of it is thought provoking and makes one think further about the whole matter
If you were in the debating chamber in parliament and were addressing the opposition with the words you use – you would be asked to leave
Mr Stephen,
In your last note July 23rd you mention that the lowered price of a property due to having a lease with a rent payable is there for the benefit of the lessee, and you mention a hypothetical sum of £10k less, however I must add that many people are very aware of the historically unscrupulous nature of freeholders and developers et al, and you state at the beginning of your notes that…”ground rent terms were proposed by the developer when granting the lease” but there is no mention of how this was determined.
One of the cases that LKP highlighted was a freehold property being sold at a lower price than a leasehold property, the two properties being very similar, and sold by the same builder, I think the difference was in the order of tens of thousands.
It does conjour up a scheme whereby the developer sits down with the builder and brings out a figure for the price of the property which depends on what sort of new car they want that week and has no relevance as to what should be a fair price.
Indeed there is again no regulation as to the profit margin that developer/freeholders should be held to and the housing market has become a lucrative free for all which has attracted the sort of people Mr Jenrick has called ‘egregrious’.
It is with this sort of atmosphere that prospective purchsers of properties find themselves in, as if you were dealing with a dodgy car salesman, but now the stakes are set much higher than being sold a car with problems, at least you can be rid of, and get another !
Mr Stephen, you don’t also mention that the lease comes with terms, and now many are being deemed by Government as ‘onerous’ and again historically these ‘terms’ have been used by clever legal people to strip away that which many hard working folk have earned. the proceeds going to unknown investors with not the slightest interest in how their cash cows are being exploited.
It has come to the point that many people are not only very wary of anything to do with leasehold properties but also very wary of developers, builders and the freeholding companies, indeed anything to do with house purchase in general, that do so much harm to ordinary folk…so much so in fact that it is my opinion that they are now seen as hateful bunch of charlatans.
As Cherry Jones has rightly said (jul 22nd) in her post above,
” they are just sitting biding their time ready for the next moneymaking scam to fleece leaseholders. Shame on you.”
Lol, I would rathe have the disinterest leeseholders managing the property than thise crooks y&y management who took over ten years ago, havent once cleaned the carpets(thick layer of dirt), or replaced them (now 40 years old and fast decaying) and never cleaned a single window. Thick cobwebs in the hallways. No locks on the communal Door. Front Door literally rotting away. Rubbish dump due to fly tipping left for 4 months until I got the council on them. And many many other issues.
A managing agent who lies about everything and tries to maintain the fiction they have no relationship with freeholder. Yeah I’d take a disinterested leeseholders anyday.
But lets be serious here , this Goverment don’t care and nothing serious will be done to help leaseholders.
Wrong, this government does care. But not about leaseholders, this government cares about preserving the status quo to the extent that they can get away with. Legislation going through parliament will, as always, be inadequate. The property barons, freeholders, and assorted professionals, will continue to enrich themselves at the expense of ordinary folk.
There is only one solution to domestic leasehold, abolition. And aboliton with restitution, but – as has been pointed out on numerous occassions – when slaving was abolished, it was the slavers who received monies (for loss of human capital), not the freed slaves. We are no further advanced in this the 21st century, even the God awful Law Commission has made reference to the human rights of freeholders.
Well said Arthur….
Sorry……David ! …