Historic changes to ground rents on the table

The housing market in England and Wales has long been a subject of scrutiny and debate. One critical aspect that has drawn attention is the issue of ground rent for residential leaseholders. The Government’s latest move to cap the maximum ground rent opens a new chapter in the ongoing efforts to create a fair and transparent leasehold system. This blog post delves into the key points of the recent consultation and its potential impact on millions of homeowners.

Background

The Government has already taken significant steps to address concerns related to ground rent, particularly with the Ground Rent Act 2022. This legislation ensures that new residential leases come with a minimal peppercorn ground rent, effectively reducing it to zero. The focus has now shifted to extending these protections to existing leaseholders, and the current consultation aims to explore various options to achieve this. 

Options Outlined in the Consultation: 

The consultation outlines five key options that the government is considering to cap ground rent for existing leaseholders: 

1. Capping ground rents at a peppercorn

This option mirrors the approach taken with new leases under the Ground Rent Act 2022. It suggests maintaining a symbolic, almost nominal ground rent, setting a precedent for fairness in leasehold agreements. Clearly this would be a significant victory for a leaseholder with a lease that is currently subject to an onerous ground rent clause, such as £250 doubling every 10 years, or worse. 

In addition, there are a vast number of RPI linked ground rents that are reviewed every 5 or 10 years on an upwards only basis. Leaseholders with little or no advice when entering into these provisions have found their ground rent rising to hundreds of pounds due to sky high inflationary figures. 

How will these changes interact with ground rents linked to the sale value of a property? This is another question that will have many interested in the outcome of the momentous changes to the leasehold system. 

What about the lease?  

This is a tricky issue that’s easily overlooked. But it will also have a critical impact on your readiness to sell. It’s simply essential to establish whether the lease is in a fit state to be sold. What is the duration? Does it need extending? Are there any issues with ground rent? Is there a missing freeholder?  

These are just some of the questions you need to be clear on when you start the process. If there are any issues with the lease or freehold, it could affect the value and desirability of the property. Similarly, if you wanted to extend the lease before selling, this in itself is not straightforward.  

This goes back to our first point about getting your paperwork in order. This is where we can help you establish all the relevant leaseholder and freeholder information. It’s also why we’d recommend retaining a solicitor the moment you decide to sell. This isn’t just about spotting pitfalls – it’s also about peace of mind. If the lease presents no barriers, you want to know that as soon as possible so you can breathe easy!  

2. Setting a maximum financial value for ground rent

Another option on the table is to establish a monetary limit on ground rents, providing a clear financial boundary within which leaseholders must operate. 

3. Capping ground rents at a percentage of the property value

This approach introduces a proportional cap, tying ground rent to a percentage of the property’s overall value. This could ensure that ground rent remains reasonable and proportionate to the property’s worth. Whilst this may still create opportunities for disagreement between freeholders’ and leaseholders’ valuers, it will certainly narrow the issues that can be argued over, and hopefully save leaseholders to professional costs of protracted negotiations, sometimes employed by unscrupulous freeholders

4. Limiting ground rent to the original value when the lease was agreed

A historical perspective is considered in this option, suggesting that ground rent should be frozen at the initial agreed value. This prevents any escalations over the course of the lease despite those increases being part of the contractual agreement; this may be open to a human rights challenge by investor landlords that have relied on planned increases when making their freehold or ground rent investments. 

5. Freezing ground rent at current levels

The most straightforward option involves freezing ground rent at its current levels, offering stability for existing leaseholders and avoiding any future increases. 

Government Commitment and Future Reforms

The consultation is part of the Government’s broader initiative to create a more equitable leasehold system. The Leasehold and Freehold Reform Bill, slated for introduction to Parliament soon, represents a comprehensive effort to address the complexities and challenges faced by leaseholders.  

The Bill aligns with the government’s manifesto commitment to enhance transparency and safeguard the interests of millions of leasehold property owners. 

Final thoughts, for now 

As the public consultation period unfolds over the next six weeks, homeowners and stakeholders (including pension funds and institutional investors) have the opportunity to voice their opinions on the proposed ground rent reforms. We anticipate a fierce resistance to these changes. 

The Government will need to weigh up how best to proceed with making things better for leaseholders (its stated aim) whilst avoiding taking measures that would leave it open to a potential human rights-based challenge by landlords, which have relied on agreed contractual provisions. With the Leasehold and Freehold Reform Bill on the horizon, there is hope for a leasehold system that not only meets the needs of the present but also paves the way for a more secure and transparent future for residential leaseholders in England and Wales.