Are escalating ground rents enforceable?
By Susan Bright
Professor of land law, University of Oxford
Disclaimer: this post is an academic discussion of the law and not legal advice. You should not rely on this blog post. You should seek your own legal advice on the topic discussed.
The Labour Government is committed to ‘tackling unregulated and unaffordable ground rents’, but there is no information about the timetable or what form it will take.
Will it be as radical as Michael Gove’s preferred position of reducing it to a peppercorn, or frozen at current levels, or something else?
In the meantime, the National Leasehold Campaign’s media output is full of stories of people trapped in homes that they cannot sell because of doubling, and inflation linked, ground rents.
But what if these ground rents are not enforceable in the first place?
The Competition and Markets Authority suggested that mis-selling and ground rent terms could break consumer protection law.
In 2019 it secured voluntary pledges from freeholders and developers to replace clauses that double more frequently than every 20 years with clauses that link escalation to RPI, although this was not altogether successful, and it is now recognised that RPI clauses can be even worse than doubling ones.
The CMA has also obtained undertakings from several large developers to remove ground rent clauses that double more than every 20 years. But thousands of leaseholders are still left with ground rents that prevent them from selling, and that push up the costs of leasehold extensions and enfranchisement.
Can consumer protection law help them?
Surprisingly there has been no public debate on this. In an article published in the Cambridge Law Journal I explore the question of whether escalating rents are enforceable and conclude that they may not always be.
The main argument is based on the Consumer Rights Act 2015, but there are additional arguments that they may be struck down under the doctrines of non-derogation from grant and repugnancy.
The full article is available here but this post outlines the position under the Consumer Rights Act 2015:
Part II of the Consumer Rights Act 2015 concerns unfair terms in consumer contracts. It stems from a European directive that has a high level of consumer protection at its heart, acknowledging that the consumer is in a weak position vis-à-vis the seller, as regards both their bargaining power and their level of knowledge.
Even post-Brexit the application of Part II is guided by a mix of English and European case-law, strongly influenced by the consumer protection goal underlying the directive.
Section 62 of the Act provides that unfair terms are not binding on consumers. There is, however, an important caveat in section 64 – terms cannot be assessed for fairness if they specify the main subject matter of the contract or relate to the appropriateness of the price by comparison with the services supplied.
In addition, to be excluded the terms must be transparent and prominent.
At first glance section 64 may therefore suggest that escalating ground rents cannot be assessed for fairness, but there are arguments against this.
The argument made in the article is that the main subject matter of the contract is the purchase of a leasehold interest in return for a premium; ground rent is simply not part of this.
Nor does the price/quality exclusion apply: there are no services being supplied in return for (‘by comparison with’) the rent.
As the previous government’s consultation noted, ground rent is ‘something for nothing’.
Whether or not section 64 excludes the assessment for fairness is critical to whether the unfair terms provision in section 62 applies, and litigation would be needed both to clarify the application of section 64 to ground rent terms, and to take account of the individual lease terms (to determine whether the particular terms are transparent and prominent).
But if, as argued, section 64 does not exclude escalating ground rents, this paves the way to applying the test for unfairness in section 62: whether, contrary to the requirement of good faith, the term causes a significant imbalance to the detriment of the consumer.
The combination of poor selling practices by developers and the ‘something for nothing’ argument means that many escalating ground rents would be likely to be found unfair.
Applying the Consumer Rights Act 2015 to residential leases is not straightforward.
Not only is there complexity around the application of the unfairness test and which terms are excluded from review, but the longevity of leases also complicates the legal analysis. Residential leases last for decades or centuries, and they change hands frequently.
In its work on event fees, the Law Commission said that this made the application of the 2015 Act to residential leases challenging.
One difficulty is knowing how to approach it after a lease has been assigned as the contract is between the original landlord and leaseholder. The article argues that this is not a problem. The Landlord and Tenant Covenants Act 1995 says that the new leaseholder will only be bound by terms that bound the assignor; if the rent clause is not binding on the original (consumer) leaseholder it will not be binding on the new leaseholder.
No doubt the views expressed in the article will be hotly contested, especially as the argument covers largely uncharted waters with complex legal reasoning.
But the implications of the argument are profound. There is the obvious point that if a term is unfair, there is no liability for a leaseholder to pay.
This does not mean leaseholders should now refuse to pay – that would be an extremely risky course of action given the draconian remedies that could follow and they should take legal advice on their position.
As noted above, there would need to be litigation to test the application of section 62 and the exclusions in section 64.
But if a term is found to be unfair under section 62, the fact that it is not binding also means that (in accordance with the European law from which the legislation originates) leaseholders would be entitled to recover past payments through the law of restitution.
There will be further consequences.
One is that it will affect the price that has to be paid for leasehold extensions and enfranchisement.
And it will also take the wind take out of the sails of lobbyists arguing that it would violate the human rights of landlords if ground rents are capped or frozen.
Related posts:
Government considers adding leasehold abuses to consumer protection law
Railpen: We don’t want to invest in ground rents anymore because ‘there is a consumer on the far end’
98% of rip-off lease sales broke consumer protection rules, says Conveyancing Association
Make sure ground rents are dead and buried by improving the Leasehold Reform (Ground Rent) Bill
Freeholders face £27.3bn fall in asset values if ground rents reduced to peppercorn, says government
Path is set to kill off leasehold and replace it with commonhold
A distinction must be made between situations where ground rent terms are disclosed after the sale process has begun, versus sales where these terms were clarified before the parties engaged in detailed lease examinations. This was the point made by the CMA.
If an investor conducts a thorough review of the lease prior to bidding at an auction for example where the lease is clearly disclosed in the legal pack —to assess the potential rent and costs associated with owning the property—and then places a bid accordingly, it would be absurd to cap or cancel the ground rent terms they agreed to pay. The original contracting party who signed the lease decades earlier cannot be questioned to ascertain their understanding of the ground rent conditions at the time of signing.
Determining whether the premium asked reflected the ground rent terms can be challenging. Without a forensic analysis of the build costs at the time and an imputed rate of return on capital, establishing the claim that ground rent is for “no service” is difficult. Developers, aware that they could sell the freehold with ground rent, may have accepted a lower price for the property to alleviate financial pressures from banks.
It is important to emphasize that if the developer clearly specifies the desired premium and the income stream, and provided the rent clause is not unjust, it should be upheld. Otherwise, it undermines the principles of contract law, particularly when all parties are legally represented. A ground rent clause where the rent increases by the lower of the planned amount in the lease or inflation ensures that the ground rent does not increase in real terms throughout the lease. This approach also addresses the human rights of the owner of such an income stream.
My Wife and I pay the ground rent invoice in full every year, even though we have not received a hard copy since February 4th, 2022.
It would appear that the Freeloader has outsourced this responsibility to other parties.
The ground rent notice does not specify what our payment is for or what goods or services we should expect for out money.
We believe that this is an unreasonable charge, as it appears to be a payment with no tangible benefits or services provided in exchage?
Previous Government have described this medieval feudal form of tenure as “money for old rope” Which I agree with.
The lease is clear that it is for no service, it is a financial burden on the property.
You have to consider that financial burden and the premium being sought and decide if that makes for a fair bargain. You either accept it, renegotiate or walk away.
Would you buy a flat with a 999 yr lease with a fixed ground rent of £500 pa for £180,000 or the same flat with a peppercorn rent and same term for £200,000 – its a choice. But if you buy the former you can’t later say the rent is unfair at £500pa
It would help enormously if the Consumer Credit Act had been extended to include ground rents such that when offered the deal I have just outlined you had been advised that the NPV of the rent in the first deal was £10,000 assuming a discount rate of 5%
By disclosing the NPV the purchaser could make an informed choice
The option of ‘walking away’ works for many non-essential consumer items. However land is a finite resource, and consequently so is housing. A home is also a human right as the freeholders themselves seem keen to remind us. When ownership of a finite and essential human resource is concentrated in so few hands it’s a political problem. When those owners attempt to ‘double charge’ for that resource (market value premium + ground rent) the law has to intervene.
We purchased our home for personal residence, not for property investment, like millions of other Leaseholders.
In hindsight, we regret purchasing a leasehold property. Our qualified solicitor handled the purchase over a brief phone call. After a few years, we saw significant increases in our service charge. In March 2022, following informal residents’ meetings, we applied for the Right to Manage and successfully reduced the service charge for three consecutive years while boosting the reserve fund. Many residents noted improvements in the property’s appearance.
It is my belief that ground rent will be abolished by the end of this Parliamentary term. The remaining issue, in my view, is determining the appropriate compensation for the Freeholders.
Easiest way to solve this might be to simply scrap marriage value & ground rent capitalisation. These are the two main barriers to leaseholders using the existing law of Section 42 to get a new long lease with zero ground rent. This avoids the legal wrangle over changing existing contracts.
Ground Rent is obviously a feudal form of tenure as it began in the Middle Ages when wealthy landowners who lived in their Manor Houses leased out their land to workers and tenant farmers. They collected ground rent, (sometimes just peppercorn), to make it a legal transaction and to confirm their ownership.
Later it could be seen a an easy way to make money and charges somewhat increased.
Then in around the 1980s along came the boom in Retirement Complexes where is could be seen that there was plenty of profit to be made from ground rents
Layer the big housing developers joined in and ground rent with all their abhorrent conditions attached became widespread. They included the following.
1 Ground Rents up to £600pa
2 Doubling at regular intervals
3 Extra charges to make alterations
4 selling off the freehold to unknown offshore finance companies.
5 Leaseholders not given the chance to purchase.
6 Purchasers being hoodwinked by being encouraged to use the Developers solicitors
7 Exceptionally high marriage values when purchasing the lease.
8 Many short lease periods of 99 years which within 20 years become a problem.
The sooner it gets abolished the better.
The only situation where I think it could remain is in some Social Housing where the Landlord is a charity and provides complete care to the very elderly. Many of them especially those with no dependants to help out could not cope with the change.
Nevertheless there needs to be much better Government regulation of these companies.
Michael,
I agree with your post. This form of feudal tenure, implemented circa 1066 +, greatly benefited the Lords of the Manor, while their Serfs were illiterate.
Your summary of events from 1980 onwards precisely highlights how the monetisation of this United Kingdoms housing market benefited an almost insignificant minority over the overwhelming majority of Leaseholders.
It may be prudent for the Government to consider purchasing several tons of “Peppercorns” in preparation for any potential compensation package that might be agreed upon.
You are seeking to amend a contract where all parties were legally represented. During a period of 2-3 months, the purchaser raised queries and sought clarification before agreeing to the terms. The ground rent was included as part of the overall financial consideration, and historically, at the beginning of the 20th century, ground rents often constituted 10% to 20% of the property’s rental value—significantly more than a nominal amount.
Nevertheless, you contend that a future purchaser of the lease, potentially decades later, could assert with confidence that the original leaseholder’s payment for the leasehold property was sufficient and that the matter of ground rent did not receive adequate consideration. You argue that the landlord received an appropriate premium, thereby negating the need for ground rent, despite the lack of supporting cost assessments. Furthermore, even if the landlord did indeed benefit from receiving both a full premium and ground rent while other similar properties were sold at a nominal rent, such a scenario is within the realm of possibility in our free market economy.
stephen,
The Government is taking significant steps to address the issues plaguing Britain’s housing market, which has been exacerbated by decades of neglect from all political parties.
Currently, the average age for first-time homebuyers exceeds 33 years. Many individuals in this demographic continue to reside with their parents while saving diligently to secure deposits ranging from £20,000 to £80,000 for their first homes. This situation is both alarming and unacceptable in the United Kingdom. For the sake of conciseness, I will not delve into Shared Ownership or Park Homes schemes, nor the property rental sector in this post.
The Fleecehold form of tenure has considerably contributed to the disorder within the United Kingdom’s housing market in my opinion. This is primarily due to the aggressive monetisation strategies implemented over recent decades, which have negatively impacted Leaseholders and many others in my view.
In our democratic society, the Government holds the authority to amend or abolish any Law. As a proud Briton, I find it disconcerting that we continue to tolerate this outdated form of Medieval Tenure.
It is noteworthy that only two countries in the world still permit Fleecehold & Leasehold in their current forms.
There are plenty of examples where perfectly legal systems have been abolished for the benefit of the majority. Take Slavery as an example.
During that 2/3 months legal purchasing process unfortunately there were many who had little understanding of the consequences.
There are many very elderly in Retirement complexes who had no idea that signing up to a 99 year lease would result in their flat being unsellable or practically worthless after 20 years. And the grief it would give to their dependants after they died. One has only got to read the sales literature of these Retirement Home Developers justifying ground rent charges to see what I mean.. It is a big con.
There are thousands of young families who were hoodwinked by the Developers into using a Solicitor who made little of all the onerous conditions which came with the contract they were signing, especially with regard to Ground Rent. Many are now prisoners in their own homes and there has been early death or suicides as a result. Is it really fair that offshore finance companies should benefit from this.
Thank goodness we at last have a Government who is reacting to around 15 years of campaigning against this unfair process, and is proceeding to make the system fairer to all in the future. The developers and finance companies have already had more than their fair share.
Those offshore finance companies or others who purchased recent freeholds must have been aware of the grief it was causing to the leaseholders, whether the elderly in Retirement Complexes or young first time buyers of houses.
If they think they deserve compensation for the loss of this money stream then claim off those who sold it to them.
Like M&S on the Retirement flats and Taylor/Wimpey , Redrow, Barrett’s etc on the houses.
Don’t expect the tax payers to pay for, as much of their money goes towards supporting those who have suffered from this scam.
I (not a lawyer) cannot see how a ground rent term can breach consumer law if any of the following factors are in play –
(1) The leaseholder is an investor not a consumer. (As an aside this is nonsense law – plenty of consumers also invest).
(2) The original leaseholder was represented by a solicitor (if they were represented by a solicitor then the freeholder did not rip them off, their solicitor allowed them to be ripped off).
(3) The current leaseholder was represented by a solicitor (in which case their claim is not against the (previous?) freeholder who contracted with someone else, potentially decades earlier) it is against their solicitor.
It seems to me that the issues are –
(1) A past failure of government to cap all resi long leasehold ground rents at one peppercorn pa or 0.1% of flat value, and £1,000 pa in London at any point (£250 outside).
(2) Negligent solicitors
(3) Leasehold buyers who ignore the advice of their solicitors
(4) A failure of those who regulate conveyancers to say to every single conveyancer that they need to say to every leasehold buyer “you are buying a lease not a flat – you need to take specialist advice to quantify in valuation terms exactly how much less this lease is compared to were you actually buying the flat”.
James
I believe the fundamental problem is that there really is not a problem !
A ground rent in the vast majority of cases is very small less than 85 pennies a day and that leaseholders do not have a problem paying the rent but worried about what a lender may in the future thing of their ground rent terms and thus effect a sale or remortgage
The issue of 10year doublers would never have arisen if the Net Present Value of the ground rent was calculated using a defined discount rate and the NPV shown next to the premium paid and SDLT paid on the total . A ground rent of £350 doubling every 10 years for 6 anniversaries has a NPV of around £32,000 at 6% discount rate – If that was disclosed next to the premium with SDLT applied to it then questions would have been raised.
Aside from these pernicious rents which were not appreciated at the time the rest of the ground rents should remain and any increases be what was planned in the lease or the movement in the RPI whichever is the lower. Therefore a ground rent in real terms can never get bigger
Seeking to vary a contract agreed decades earlier between parties who were legally represented who are no longer on the scene based on the assumption that the ground rent terms ( which in around 99% of cases is less than £1.50 per day ) they agreed were not fully appreciated at the time and therefore unfair does seem a very challenging prospect to say the least
stephen,
Are you a Freeholder? I suspect that you may be and if true it might go some way to understanding your motives for attempting to justify doing nothing in respect of the current situation.
I read an article that stated that “93% of Leaseholders regretted purchasing a Leasehold Tenancy ” By any chance did you see that publication and if so, what are your thoughts ?
So, 93% of those surveyed, which represents about four Million Leaseholders “regret purchasing a Leasehold Tenancy” That message is abundantly clear to me and requires no interpretation?
How do you interpret the results of that survey?
It is on service charges which is where there is dispute, I have not heard of cases where people object to the ground rent terms they agreed to unless the solicitor failed to point out the terms
It would look a little foolish to say the least to disagree with a contract term if you were properly legally represented at the time of purchase and agreed to it by signing the contract
James
Many of these purchasers who you call Investors are just the very elderly who desperately need a secure Retirement Flat or young families looking for their first homes. Something they desperately need to live their lives not as an investment like those who purchase the ground rent incomes.
Also they will have been encouraged to use the Developers Solicitors who will have had little incentive to warn them of impeding problems.
Michael,
Some of my friends have purchased leasehold propertys to rent out and take an active role in protecting their investment by ensuring the property is in good internal order and the tenants concerns are addressed.
Some of those Landlords have become deeply concerned about regular significant increases in service charges without justification. This obviously causes them margin erosion and reduced profit.
A majority of those Landlords support the complete abolition of Leasehold and the introduction of Commonhold.
What happens if the freeholders only interest is in the agreed ground rent and the reversion
What would be the justification then for interfering with the freeholders rights to the ground rent income if there is clear evidence that it was agreed by the original parties decades earlier where all parties were legally represented ?
Then in those cases there is a clear line of action against the solicitors. But in other cases where the ground rent terms are discussed before signing and all parties legally represented then what is the justification then for altering the contract where the current parties may well not be the original parties that agreed to the lease terms decades earlier
Stephen, I write as someone who may have purchased their leasehold from you, with a doubling ground rent every 10 years. Sadly as a first time buyer at the time, I received zero advice from solicitors. I actually only came to realize this after year 10. There are very few solicitors that would have pointed this out 15 or 20 years ago, and I doubt the situation to date have improved. It’s the same with the local searches, you pay a solicitor a fee to literally check a box without receiving much of an advice. There I am now, living in a new-build property where the developer hasn’t even signed the S278 legal agreement with TFL and the Council yet allowed building occupation, exposing all residents at the risk of ending up having unadopted roads. The whole property system here is flawed with very few protections for the buyers. How can first time buyers be meant to understand all of these complexities? All I’m trying to say is that things should have not been so difficult and complex for becoming a homeowner.
Is the 2015 act retrospective and is it statute barred? There are multiple unfair terms in my lease and overlooked by the conveyancer. Also other relevant facts not disclosed at the time of purchase. One example, the company set up to run the management is actually controlled by the developers solicitor but on the surface it appears to be leaseholders. Rent review terms are ambiguous as well.