Leaseholders would require a heart of stone not to be amused by the government’s assault on freeholders’ ground rent incomes. This long-festering corner of the residential market has attracted some of the least appetising spivs in property – before, of course, the British insanely made their homes one of the world’s best performing investment assets. So now freehold punters – where they are known – include some of the richest people on the planet, enjoying a legally enforceable income stream off the property owning hopes of ordinary people
Freeholders face £27.3bn loss in asset values if ground rents are reduced to peppercorn, says government today in its impact assessment of the options to reform. Over the first ten years, setting ground rents to zero would dry up ground rent income to the tune of £5.1bn.
“Whilst many freeholders would continue to hold a valuable long-term interest in leasehold properties, eg from lease extension premiums, we would expect several freeholders to exit the market if a peppercorn cap were introduced,” the government said.
“The main benefits of this proposal would fall to leaseholders and amount to an estimated £5.1bn (10 year present value) – the savings to them of no longer having to pay ground rent charges. This option is assumed to benefit the 86% leaseholders who report paying ground rent (c4.5m leaseholders in England and Wales). We estimate an average leaseholder saving of £1,136 (PV) over 10 years.”
The full impact assessment can be read here:
https://www.leaseholdknowledge.com/wp-content/uploads/2023/12/GroundRentReformImpactAssessment.pdf
Or here from the department’s website:
The government says: “The continued existence of ground rent charges in their current form stands in the way of government achieving our commitment for a more transparent model of homeownership. Government intervention is necessary to achieve that.”
The government has assumed there are 4.98m leasehold properties in England and 235,000 in Wales. It has further assumed that 18% of leaseholds (about 900,000 leases in England and about 43,000 in Wales) have escalating ground rent terms where the ground rent will increase in line with the Retail Price Index (RPI) pre 2030, and CPI from 2030 onwards every 10 years. This is based on the Competition and Markets Authority, which carried out the investigation into missold properties with aggressive ground rents.
The remaining leases that pay ground rents (about 3.4 million in England and an estimated 160,000 in Wales have fixed ground rents.
The CMA helped around 20,000 leaseholders who were sold properties with aggressive ground rents that made them impossible to sell. It won commitments from housebuilders and freeholders to intervene (and forgo the potential profit from an impossible ground rent).
The impact assessment notes that the CMA has publicly acknowledged that it can “only partially address the concerns its investigation has uncovered and that the most comprehensive way to tackle problems with ground rent is through legislation”.
The impact assessment then considers the other four options to reform ground rents, which are subject to a consultation with a deadline of December 21.
The impact assessment also includes:
“The Government is consulting on a range of options with no preferred option.”
Option 2
This is the proposal for a ground rent cap of £250, which is the value at which mortgage lenders impose conditions on leasehold properties when lending.
The impact assessment says: “We estimate [this] would see a total cashflow transfer from the loss of ground rent from freeholders to leaseholders in England and Wales of £2.3 billion (present value) over the 10-year appraisal period.”
In addition, it estimates the change in asset value at £14.6 billion (this includes and is not additional to the 10-year cash flow impacts).
“We would not expect a significant number of freeholders to exit the market as a result of introducing this measure; given it would allow a permissible ground rent …
“Many freeholders would continue to hold a valuable long-term interest in leasehold buildings, including from the receipt of ground rent where permitted and premiums from lease extensions …
“Pension funds and insurance companies that are reliant on residential ground rent income to meet index-linked liabilities to their members would need to find alternate investments to meet those liabilities.”
This option would benefit an estimated 940,000 leaseholders in England and Wales. On average, individual leaseholders would benefit from a £2,457 (PV) transfer from freeholders over the 10-year appraisal period.
The impact assessment states: “We estimate 37% of leaseholders let their property in the private rented sector (PRS). They are treated as businesses for the purposes of this impact assessment and would benefit from the proposed measures.”
Option 3
This is the proposed cap on ground rents to be no more than 0.1% of the property’s resale value
This would also see freeholders losing £2.3 billion, to the advantage of leaseholders, over the 10-year appraisal period.
The impact assessment estimates that freeholders would lose – and leaseholders gain – £14.7bn throughout the leases’ term. (This includes and is not additional to the 10-year cash flow impacts.)
The impact assessment states: “Many freeholders would continue to hold a valuable long-term interest in leasehold buildings, including from the receipt of ground rent where permitted and premiums from lease extensions …
It adds: “Leaseholders may see an increase in the service charge they can be expected to pay if services currently provided for through ground rent are invoiced to the service charge.”
This option would benefit an estimated 1,020,000 leaseholders in England and Wales, who would gain the benefit from an average £2,277 (PV) transfer from freeholders over the 10-year appraisal period.
Option 4
This limits ground rent to the original amount stated in the lease
The impact assessment estimates that this would see a total transfer from the loss of ground rent from freeholders to leaseholders in England and Wales of £0.6bn (present value) in the 10-year appraisal period.
In addition, the loss in asset value by calculating the loss of ground rent income over the total remaining lease term arrives at an estimate of £7 billion.
Option 5
Freezing ground rent at current values
This would apply to all leases signed before the Leasehold Reform (Ground Rent) Act 2022 came into force
The impact assessment states: “Due to modelling assumptions, there is no impact captured over the 10-year appraisal period for this option as a result of the assumption that variable ground rents increase every 10 years. Therefore, we have chosen to present the impact of this option over 11 years in order to provide a monetised estimate.
“There is estimated to be a £469 (PV) average saving for leaseholders over an 11-year appraisal period.
“As well as the 10-year cash flow impacts in the headline figures, we also estimate the change in asset value by calculating the loss of ground rent income over the total remaining lease term. This is estimated at £4.2 billion.”
The government does not appear to enamoured of the freehold owning sector.
“We do not see clear evidence that the attempts at sector-led reform, most notably the public pledge for leaseholders [27 June 2019], have delivered suitable outcomes and eradicated the issues caused by even the most problematic escalating ground rents. Correspondence from leaseholders suggests that some freeholders who signed the pledge are still using leases that contain doubling ground rent clauses.”
https://www.gov.uk/government/publications/leaseholder-pledge/public-pledge-for-leaseholders
“The option to cap ground rent in existing leases at a peppercorn would deliver the most favourable result for leaseholders, providing the same benefits that new leases have that are granted post the Leasehold Reform (Ground Rent) Act 2022. This option would have the most significant impact on freeholders, including institutional investors and we are asking part of the consultation process for respondents to share any evidence on the potential impacts on freeholders, leaseholders, investors and the wider market.”
The government estimates 4.98 million leasehold dwellings in England, equating to 20% of housing stock.
The majority of leasehold dwellings (70%) are flats, with 3.5 million leasehold flats.
There were 1.5 million leasehold houses in 2021-22 which made up the remaining 30% of leasehold.
London has the highest proportion of leasehold dwelling of the nine regions in England, 36% (1.4 million dwellings), closely followed by the North-West, 32% (1.1 million dwellings).
The East Midlands has the lowest (9%) number of leasehold dwellings, just 192,000.
In Wales, leasehold accounts for around 16% of all properties in Wales, or 235,000 properties. There were more leasehold properties in densely populated conurbations, with Cardiff and Swansea as “hotspots”. Leasehold houses comprise a larger proportion of the leasehold market in districts with a mining legacy.
Related posts:
Government told to curb excessive ground rents and ‘disassociate’ from freeholders’ ‘Pledge to Leaseholders’ by Communities Select Committee
Ground rents to be allowed in retirement housing, says government
New LEASE chair declines to endorse peppercorn ground rents on BBC
‘Peppercorn’ ground rents on Help To Buy properties … from next year
Scandal makes Ground Rents Income Fund plc fall £6m since March but … it has paid out 40.6% in three years
Leasehold and Freehold Reform Bill: the most important part of the enfranchisement bit is missing
Freeholders have been making huge profits for too long. If they don’t make money on the ground rents then they will get it back with unexplained services charges. For too long many have been sucking the life out of leaseholders by making money but not delivering the goods. Its about time the freeholder had some rights.
It is remarkable that everyone is so moderate in expressing their opinions on leasehold. This form of tenure is criminality – just because something is not on the statute book as criminal doesn’t mean it isn’t criminal. If and when leasehold is abolished, a problem will arise. Those involved in this racket will exercise their minds on finding another way to fleece joe public. Slavers never went away when slavery was abolished, they simply moved on to other ways of making money illicitly.
I don’t pretend to understand the precautions required when following procedures and drafting legislation due to freeholders ability to resort to the courts. But it is my conviction that government has the ability and power to do what is wanted, and required – abolition, they simply resist doing so. Why could this possibly be?
Who cares what the freeholders want. They have had free money out of leaseholders for to long now. They are criminals stealing money from the Lower orders. Always been the same. Rich get richer while the poor are expected to foot every unfair bill known to man. F**k the freeholders. It’s about time they have been slapped down a little. NO MORE FREE MONEY FOR GREEDY FREEHOLDERS USING US ALL. AS CASH COWS.
I am a Leaseholder and others in my block have been forced to pay thousands to Freeholders because Mortgage Lenders will not accept the clause our Leases about 5 yearly ground rent increases. Government must be able to sort this out, why are they so slow to act. I have written to Mr Gove but only get a standard printed letter from his outtray as a reply via the researcher. The Freeholder does not even pay the Buildings Insurance, the Leaseholders pay over 2K per annum for something they do not even own. This must be illegal, Solicitors handling the conveyancing do not explain Leases to their clients. They just hand over a 60 page legal document leavingJoe public unable to understand the legal jargon. Government needs to act soon, the question is, is this Government capable when they keep sacking or appointing a new housing minister. If they don’t there will be more people sleeping on the streets and empty apartments.
“Leaseholders face £27.3bn rise in asset values if ground rents reduced to peppercorn”
There, fixed it for you.
The Freeholders have been aware of the possibility of Legal reform including abolition of this Industry sector since about 2017, and have campaigned hard to prevent that occurring.
I believe that those Leaseholders who have completed the Government survey and selected the peppercorn option, should now actively encourage their fellow Leaseholders to complete that survey unless they have already done so.
I can easily imagine how hard the Freeholders have lobby Government with Leaseholder money to maintain the status quo or to stop any Legislation that would reduce their income streams to zero.