Welsh policymakers back monetary ground rents while pondering ‘compulsory commonhold’

By Harry Scoffin

Developers should continue to be able to profit from selling the freehold reversion, a report commissioned by the Welsh government has concluded.

Although the UK government has recently re-committed to banning ground rents on new leases in England, ministers in Wales may still come out in favour of monetary ground rents.

Housing policy has been devolved to Cardiff Bay since the Wales Act 2017.

In a report published on Wednesday, the Residential Leasehold Reform Task and Finish Group recommends “the reduction of future ground rents to a nominal financial value”.

The proposal is likely to court controversy as the report had input from ground rent fund Long Harbour.

It gives no explanation as to why Wales should not follow the UK government’s lead in committing to zero financial value, or peppercorn, ground rents.

The UK government has linked monetary ground rents to “exploitative practices in the leasehold sector … [which] put corporate profit over consumer protection”.

In a foreword to MHCLG’s response to its technical consultation on leasehold reform last month, Communities Secretary James Brokenshire said:

“Consumers see no clear benefit from ground rents. I want to ensure that consumers only pay for services that they receive, so ground rents on newly established leases should be set at £0.”  

By contrast, the Welsh report suggests in an appendix that monetary ground rents are necessary, as the:

“income derived from the ground rent cash flow within the leases provides a suitable match for the long term liabilities of these institutional investors which include insurance and pension providers and in return the institutional investors will service as responsible stewards for the duration of a lease.”

The UK government refutes suggestions that ground rent is needed to ensure freehold owners play their long-term ‘custodial’ role:

“Ground rent is unconnected with any maintenance obligation and allows freeholders who wish to engage in supervision to do so if they wish, but without any accountability if they do not. The costs of management and supervision are generally recoverable under the leases from residential leaseholders through the service charge. It is therefore possible for any stewardship functions to be paid for via the service charge.”  

The Residential Leasehold Reform Task and Finish Group’s definition of “nominal financial value” is unclear.

However, the report references the Welsh administration’s March 2018 announcement on changing Help To Buy regulations, to ensure that the initial ground rent cannot exceed 0.1% of the property price, but can increase in line with the Retail Price Index (RPI) thereafter.

It is not known whether the Welsh government considers a ground rent starting at 0.1% of capital value to be nominal.

The outgoing Bank of England chief Mark Carney has repeatedly called for an end to “meritless” RPI, with LKP reporting how RPI-linked leases can pay out more to a ground rent investor than the traditionally onerous 10- or 15-year doublers.

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Long Harbour’s involvement in the Welsh government’s review of leasehold raises questions over the influence of corporate lobbyists and other industry insiders on policymakers.

In the report, Long Harbour is said to be “facilitating investment through transparent structures with strong corporate governance”.

LKP has in the past questioned why some Long Harbour-linked freeholds have their ultimate beneficial ownership hidden.

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Landlord and tenant solicitor Cassandra Zanelli, acting in her capacity as an “honorary consultant” of the Federation of Private Residents Associations, also advised on the report.

Ms Zanelli was criticised by LKP in November 2018 for giving one-sided evidence to the Welsh Assembly on the cladding scandal.

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ARMA, which was shut out of Lord Best’s working group on regulating property agents in England, is endorsed by the Residential Leasehold Reform Task and Finish Group. The organisation has been nominated to work alongside the Welsh government to drive up standards across the managing agent sector:

“To reduce administration, professional bodies such as the Association of Residential Management Agents (ARMA) etc. (who must apply for the status of a recognised body) can help the Welsh Government organisation by undertaking any administrative checks such as Client Money Protection, Professional Indemnity Insurance, and independent accountant’s report (confirming suitable banking facilities are in place) and Fit and Proper person tests on directors.”

Commonhold is one area where a much stronger pro-consumer stance has been taken.

The report urges scoping work on how mandatory conversion of the existing leasehold stock in Wales would work and whether the move would unfairly push up property prices as leaseholders become commonholders with land ownership.

The proposed feasibility study goes far beyond the current UK government’s planned reforms.

Campaigners in England pushing for leasehold’s replacement with the democratic and more transparent commonhold title will be cheered by this news from Wales.

The full report can be read in full here: LeaseholdReviewWalesJuly2019

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