DEADLINE DATE FOR CONSULTATION RESPONSES IS NOW 17 JANUARY 2024
The government’s leasehold reforms are now moving fast and it wants to include a cap on existing ground rents without prompting a judicial review from the freehold punters who have bought them up.
The government is offering five options to remove ground rents, and wants to know which leaseholders would prefer.
This means yet another consultation, and it is essential that leaseholders respond: those who have seen sales fall through; mortgages refused; living in retirement sites; or have been pursued with eye-watering fees from debt collectors because the ground rent demand either was sent to the wrong address, or wasn’t issued at all .
LKP is urging that all ground rents be set at a peppercorn in order to avoid the creation of a two-tier market, and that leaseholders should choose this option.
The government website announcing the consultation reads:
“We understand that freeholders, collectively, would very likely lose revenue as a result of implementing a cap on existing ground rents. The scale of this loss may be dependent on which option of a cap was taken further. Regardless of the option taken forward, we would not expect to compensate freeholders for lost revenue, nor do we expect freeholders would be able to capitalise this lost income stream through other means.”
The government is consulting not because it is unaware that ground rent games are gamed by big freehold owning funds like Long Harbour, Tchenguiz Family Trust, Wallace Estates, E&J Estates, Pier / Regis and all the rest of the private equity gameplayers – some of the richest people on the planet, and usually offshore – represented by the Residential Freeholders Association.
The government is also aware of unsavoury characters like Martin Paine, who does a bit of trickery when leases need extending to return doubling ground rents back to the date when the lease was first issued, resulting in poorer families facing ground rents of £8,000 a year.
Sir Peter Bottomley described this gentleman’s trickery as “turning the sleaze of lease into an artform”.
Nonetheless, his unfortunate victims should respond to the consultation
The essential way to respond is to fill out the online survey here:
https://consult.levellingup.gov.uk/leasehold-reform/38011950/
Michael Gove, secretary of state for housing, announces the consultation saying:
“There is no legal requirement for these ground rents to be reasonable or linked to any service provided.
“While a freeholder or investor may see ground rent as a useful income stream for a leaseholder it can appear to be simply an annual reminder that you do not own the land your home stands on, that your lease on it is finite, and that there is a payment for the privilege of staying there.
“It is a historical anachronism, already eliminated for new leases, and we now wish to take action to help those with existing leases.”
A core argument in favour of a ground rent cap is that leaseholders should only pay for costs from which they gain material benefits. Service charges already exist to cover the cost of delivering management and maintenance of the block.
The government states: “We believe that more frequent inflation linked increases [in ground rent] which were previously rare, have become the common ratchet by which ground rents increase.”
The government sets out five options:
- capping ground rents at a peppercorn
- setting maximum financial value for ground rent
- capping ground rents at a percentage of the property value,
- limiting ground rent to the original value when the lease was agreed
- freezing ground rent at current levels
The government document points out that investors in ground rents contract out the management of their sites to third party management companies: “So, from the outset, leaseholders are faced with a complex management structure that they have had no say in, all because of ground rent.”
The average ground rent according to the English Housing Survey 2021-22 was £298.
It is stated that 78% of estate agents in Propertymark (formerly National Association of Estate Agents) reported that a leasehold property with an escalating ground rent will struggle to sell, even if priced correctly.
But an escalating ground rent is the scenario faced by the majority of leaseholders who have bought a new build property after 2000.
The Competition and Market Authority (CMA) estimated in February 2020 that this affected 670,000 new-build leasehold flats and over 100,000 new build leasehold houses.
Option 1: Capping ground rent at a peppercorn
“This would remove the obligation to pay a financial ground rent from a given date. In theory the freeholder could still demand the ‘peppercorn’, but in effect it would mean that there was no ground rent to pay.
“This proposal would align ground rents in existing and new leases. It also has historical precedent– before the 20th century, instead of requiring a financial ground rent, many ground rents were set at a ‘peppercorn’, to save the freeholder having to collect the nominal rent. Additionally, this approach would also protect leaseholders from being required to make a payment for no explicit services in return.
This is interesting:
Through the Building Safety Fund and the Cladding Safety Scheme, the government already provides funding to freeholders who need to remediate cladding on their blocks (if they are the party with the legal right to carry out the works to the building). For non-cladding related defects, we understand that freeholders may need to raise funds to meet such costs and that contributions from qualified leaseholders are firmly capped and spread over 10 years. However, we are also aware that many freeholders who are responsible for these buildings have other avenues available to raise funds to meet their remediation obligations. If evidence exists that freeholder’s ability to meet their obligations will be detrimentally impacted by a peppercorn cap on ground rents, we encourage stakeholders to share it
Option 2: Capping ground rent at an absolute maximum value
“This would mean that there would be an upper financial value that ground rents could rise to. Ground rents which are currently below that amount would be permitted to rise to that value, but never to exceed it.
“We see merit in the simplicity of this option, in that it would be clear to freeholders and leaseholders alike over the highest financial value which could be charged for a ground rent. It would also put an end to some of the most troubling examples of current practice while having lower impacts on freeholders and investors than a peppercorn.
“However, this option would not achieve a fundamental change to the ground rent practices and eliminate the anachronism of ground rents for existing leases. It would fail to resolve the issue of leaseholders paying a charge without receiving a transparent service in return and does not deliver fairness and equality between new and existing leaseholders.”
Option 3: Capping ground rents at a percentage of the property value
“.. there was no consensus on what an onerous ground rent term is in practice nor on what percentage of the value the cap should be set at. At a high level this option would likely have lower impacts on freeholders than a peppercorn but lower benefits for leaseholders.
“The percentage that we hear called for most often is a cap of 0.1% of the property value, on the basis that ground rent above this can adversely affect a person’s ability to get a mortgage on that property, according to the criteria set by some mortgage providers.
“We have concerns that pursuing this approach could be difficult to implement and enforce, in practice requiring a programme of valuation …”
Option 4: Capping ground rent at the original amount it was when the lease was granted
“This option would provide for ground rents to revert to, or remain at, the initial level provided for in a lease. To achieve this, we could legislate to prevent any further escalation beyond the initial amount set out in the lease. This means that there could be no rise in the financial value for the lifetime of the lease.
“This option has merit in that it recognises that there is a contract entered into between the leaseholder and freeholder to pay rent and sets the ground rent obligation to the level that the leaseholder is most likely to have been aware of.
“It may be relatively simple to implement …
Option 5: Freezing ground rent at current levels
“This option would provide for ground rents to remain at the value provided for in the lease at the date that such a measure was implemented …
“This has the advantages of being simple to understand and implement and respects the existing contract … It might also have lesser impacts on the revenue and business models of freeholders than other options and would remove concerns from lenders about future escalations becoming unaffordable for leaseholders with mortgages.
“However, like the other options that continue with a material ground rent, this option does not guarantee equality between new and existing leases and does not fix the problem of leaseholders paying a financial ground rent for no clear service in return.”
“We understand that freeholders, collectively, would very likely lose revenue as a result of implementing a cap on existing ground rents. The scale of this loss may be dependent on which option of a cap was taken further. Regardless of the option taken forward, we would not expect to compensate freeholders for lost revenue, nor do we expect freeholders would be able to capitalise this lost income stream through other means. Where freeholders incur legitimate costs for service provision, they should be met through the service charge.
Regardless of which option government chooses to pursue, we would seek to override existing leases with new terms to apply only to future ground rent payments. This means that following implementation of legislation, leaseholders who receive ground rent demands which exceed the limits of our chosen cap would be able to refuse to pay them.”
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Freeholders face £27.3bn fall in asset values if ground rents reduced to peppercorn, says government
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Minister Rachel Maclean claims leasehold reform will be ‘a generational transformation’. Hugely welcome changes, but it’s scaled back as the government runs on borrowed time
I have just completed that survey It took me a little longer than anticipated, but an hour and a half of my time is neither here nor there. I think I managed to get my point of view across politely and to the point.
I believe there is mention of capping at 0.1%? What say you Stephen?
As for ‘debating’, I have to quip in a jocular manner or lose inner peace. You seem to say the same thing over and over, you see. I fear you are over-attached to ground rents but perhaps I misunderstand you? I am over-attached to doing away with a feudal system. In fact my ground rent is really rather modest, much to the stated annoyance of the freeholder who bought at auction. It is the whole sorry ediface I resent. Home ownership should not be an income stream, and I think we all know leases were raely if ever sold at a ‘discount’. In theory somebody could research like-for-like sales, but that would likely just be another cost loaded on leaseholders.
I don’t care if peasants long times past had to pay their landlord a share of their harvest and hide their new brides. Life moves on. Let’s agree to disagree and I promise not to tease. Ah go on.
Paddy,
I put a preference 1 rating on capping at 0.1%, then commented that I felt that was overly generous. I believe that any Government action should be with immediate effect.
If you signed an agreement promising to pay £400 per annum on say a £300,000 flat why should you be helped and have the rent lowered by £100 to £300.
The agreement made it patently clear that the ground rent was a no service and was a pure profit stream to the freeholder and the freeholder in deciding to proceed with the sale thought that the premium that was to be paid and the capitalized value of the ground rent made it an acceptable bargain and went ahead with it. If asked at the time if the rent could be lowered to £300 the freeholder may well have agreed if the premium was an extra £2,000.
The leaseholder being represented by a solicitor in the transaction and in the last few years would have heard of the “perils” of ground rent thanks to the campaigning, so presumably was a bit more aware and should have taken some time to understand what the ground rents terms they were being asked to take on.
If this cap on the payablity of 0.1% was to go ahead, the freeholder has no right to get any compensation. It can be hardly surprising that this will be heavily challenged on the grounds of human rights
Stephen,
Would you please reply to my previous specific questions? I would like to move our debate forward and make some progress.
Your constant repetition of the same answers to other posts may be perceived as monotonous by others.
Prior to the Kings Speech one of my Neighbours obtained a rough quote to extend his Lease, the figures presented are eye watering!!!
I would be delighted to debate this instance with you and read your reply with interest?
Stephen
You made a point about Zimbabwe . The issue I was highlighting about Zimbabwe was that land was taken from farmers without compensation.
You make another point that in your view freeholders are encouraging RTM’s . The root of almost all leasehold unhappiness centres on service charges. The issue about ground rent has mutated into a huge issue resulting from an exposure about 10 years doubling ground rents. The point that 95% of all leaseholders pay less than £1 day in rent and almost all have rises either linked to the RPI or have doubling or stair casing rent provisions every 20/25 or 33 years – this really is not the stuff of nightmares. Owning freehold ground rents subject to an RTM gives the investor the pure ground rent income stream and the benefit of lease extension premium
To winkle out those problem rents, I think is quite easy. You amend the doubling or staircasing rent provision by making the increase either the movement in the RPI or the doubling or staircase amount, whichever is the lower . The problem with 10 years doublers disappear, as would the rent reviews of Martin Paine.
All leaseholders would be left paying in real terms the same rent they promised to pay at the outset, or they may see their rent in real terms fall . We don’t trash our reputation on contract law . More importantly the reforms on service charges which have cross-party support get through
Stephen, your comment “The issue about ground rent has mutated into a huge issue resulting from an exposure about 10 years doubling ground rents.” overlooks the systemic one-sided consequence of leasehold and ground rents.
Also, you overlook that mortgage lenders are not impressed by your reasoning.
As to leaseholders knowing the caper they chose to sign into because they had access to ‘expert’ advice, consider the reality for those 95% who you suggest are fine.
I see muliple flat leases from the 1980s that sold new at below £30,000 with staircasing GR starting at a very modest (by today’s standards) £40 a year. Using BoH RPI indexing only, not HPI, those new leases would value at around £89,000 today, with GR starting at £118 a year. Unmortgageable even at full term using the lenders’ rule of 0.1%.
What should those 1980s leases be worth now using only RPI at around 60 years’ term relative to the baked in ground rent? In fact they sell at below £65,000 with GR a very modest £80 a year. Yet unmortgageable both for term AND ground rent. ?
You talk a lot about legal advice. How should the ‘expert’ conveyancer in the 1980s have advised the innocent home-owner buyer of those new leases? Or evaluate the GR? Flats could not be extended until 1993. Ever since there is the bizarre caper of calculating ‘No Act Rights’. Relativity graphs were unheard of in the 1980s.
Those leases are now grabbed up by commercial rental buyers, not by first time buyers.
Leasehold is a caper that just goes on giving an income stream to investors, not homes.
I think mortgage lenders have played a part in fuelling this near hysteria over ground rents
You quote an example where a flat with a ground rent of £118 per annum is blighting the sale of a flat being sold for £89,000
How can an outgoing of just 32 pennies a day cause an issue on the sale of a flat worth £89,000. Someone on the minimum wage earns that every 95 seconds
I think all review clauses where doubling or stair casing is mentioned should be modified so that on review it rises by the lesser of inflation or the provision in the lease
Therefore, all leaseholders will pay the same rent in real terms that they promised to pay when they took on the lease throughout the whole term. Those with fixed rents or rents that double or staircase may also see their rent fall in real terms if inflation carried on at well above 2%
There is a great deal of anger in the leasehold structure, and it is on service charges that most of it emanates from. But the ground rent provisions seem to act as the lightening conductor to bring down all this anger – leaving aside the 10 years doublers – and my proposal deals with them – the real issue is on service charges
Stephen,
Please consider and respond specifically to the following facts and questions:
1. Most of the big player Freeholders also employ other connected Companies as Property Managing Agents, do you agree with that observation?
2. Those specially selected Property Managing Agents issue service charge demands to Leaseholders, do you agree with that observation?
3. The Freehold – Leasehold racket exploitation generated by that “symbiotic” relationship has recently featured on LKP, BBC and other news outlets, do you agree with that observation?
4. The current Freehold – Leasehold racket only has one ultimate beneficiary and that is the Freeholder. do you agree with that observation?.
5. One of my Neighbours recently enquired about extending his Lease from the present term of 62 Years to 150 Years, and the reply was between £ 10,579 to £ 15,041, can you justify that cost?
6. I have heard employees of specific specially selected Managing Agents using the minimisation strategy of costs per day into penny’s, are you a current or former employee of a Managing Agent or a Freeholder, would you please answer that question?
7. Do you agree with me that the only logical way to bring Justice to the Leasehold industry sector, is the complete abolition of Freehold and the introduction of “Commonhold” for those that wish to adopt it?
8. I believe that the only organisation in England and Wales that support the as is, is the “Residential Freeholder Association” are you a member of that Association?
I look forward to your replies to my questions and further debate.
In reply to you email and addressing the first two points. There are two distinct functions in the ownership of freehold investments. The first is the function of gathering in the rent and dealing with lease extensions. The second function is the managing of the property. Invariably those two functions are split. Therefore, many owners of the freehold pass the management over to a separate company which they may or may not control.
Inevitably there will be cases of abuse where monies are gathered in advance for services and this problem will continue to arise in the commonhold arena where leaseholders abdicate the management responsibility to a third party. The reforms being proposed to leasehold in respect of the management of leasehold have currency to the commonhold structure and therefore stewardship of these trust monies under both regimes will improve going forward.
A properly working freehold/leasehold relationship will benefit both parties. The freeholder sells the lease at a discount compared to a flat with no ground rent and for a term of 999 years to reflect the burden the ground rent imposes on the flat and the expectation in future years to a renewal of the reversion. If it is felt that discount is not properly factored into the price, then that is not a failure of the freeholder but of the market. The freeholder can hardly be blamed as it is spelt out very clearly indeed what the ground rent terms are, and the term of years granted in the lease BEFORE the leaseholder signs up to the terms. The leaseholder will have had legal representation and an expert valuation on the property BEFORE signing up.
Your neighbours cost of a lease extension cannot be commented upon as the ground rent terms are not given and neither the value of the flat. But there is of course a formula in the 1993 Act. This Act gave leaseholders the right to extend their lease and therefore take away from the freeholder the right to have the reversion at the end of the term. This clearly interfered with the human rights of the freeholder; however, it was acceptable because there was a greater need for the leaseholder. Therefore, a formula was introduced in the 1993 Act. Therefore, for the last 30 years leaseholders have bought properties knowing they can be extended and an approximate figure for extending the lease easily obtained. Particularly in the last few years property transactions have been agreed where the leaseholder knows in advance what it would cost to extend the lease and so bid accordingly.
I use the minimisation to illustrate that the amount of the ground rent is not the issue. Ground rent provisions (leaving aside the 10 years doublers) seem to act as the lightening conductor to bring down all the anger over service charges. In 95% of cases the rent is less than £1 per day and a sense of proportionality needs to prevail
The root of the problem with leasehold which needs to be addressed. Firstly, the financial burden of the ground rent needs to be calculated and shown PRIOR to the leaseholder taking on the lease. I have said on countless occasions that the NPV of the rent needs to be calculated and disclosed. Secondly greater control of the service charge monies held in trust for the leaseholders. There are very sensible provisions being proposed in the Bill going through parliament which should help. It is important that Leasehold is improved so that the decision by the collective leaseholder owners whether to elect for commonhold or remain leasehold should be very finally balanced. Otherwise, it will mean leasehold is a second-class tenure and that has significant financial implications for leaseholders. I am not a member of the Residential Freehold Association
Stephen,
With regard to item 5 of my last post My Neighbour pays £ 228..42 per annum ground rent. I will give three values for his Apartment only one of them is correct, which are £60,000, £100,000 and £ 140,000. Would you please be kind enough to calculate the cost of a Lease extension from the current term of 64 Years to 150 years, using that information for all three apartment values?
If you have not already done so I suggest you read the featured article’s on this site, and especially the one titled “Marriage values? Lets have an acrimonious divorce” I thoroughly enjoyed reading both articles which Mr O’Kelly authored.
Does the ground rent rise in line worth the RPI ?
I have posted my thoughts on marriage value
Stephen,
The ground rent does not rise in line with RPI.
I read your posting it was interesting to read.
Stephen,
Would you please be kind enough to reply to my detailed and specific question by sharing your expertise and knowledge in calculating the cost of a Lease extension on the criteria I have provided you ?
A failure to do so will result in reinforcement of my belief that Lease extension costs are calculated on the “Back Of A Fag Packet” by utilising the historic tried and trusted Feudal Archaic Law means of a scientific wild ass guess (SWAG).
I continue to look forward to your reply and future debate
please set out in full the ground rent terms and its review pattern as set out in the lease – ideally post a link to the lease