Knowledge Hub | Articles

13 November 2018

Everyone is talking about ...ground rents

Charlotte Ernest

Charlotte Ernest

Tel: 01753 279094

The issues surrounding onerous leasehold provisions, mainly extortionate ground rents and leasehold houses, have now become so publicised that the government is taking steps to regulate the leasehold market, as outlined in the Housing White Paper published on 21 December 2017. Charlotte Ernest, associate in the’ residential property practice, takes a closer look at ground rents and what the future may hold.

The government’s proposals are ambitious, with plans to ban sales of leasehold houses save for necessary exceptions such as shared ownership; to set ground rents on new long leases to zero; and “to make the process of purchasing a freehold or extending a lease much easier, faster and cheaper”, to highlight just a few points. More recently in July, the housing, communities and local government select committee of MPs said it will investigate how the leasehold market is working for consumers later this year.

Such drastic proposals reflect the widespread negative response to the issues the government intends to tackle.  Over the past two centuries, ground rents have been transformed from peppercorns to prickle sores, culminating in their current state as irrevocable thorns in leaseholders’ sides. Despite some developers setting aside vast sums to prune such clauses, it is yet to be seen how much foliage will be stripped back.

There are two main issues for property owners - excessive ground rents and escalating ground rent, which come under regular reviews during the lease term, often without a cap.  Both have a clear impact on affordability and potential value or re-sale of a property.

Some developers have addressed the issue through use of RPI ground rent clauses but these are starting to be seen as wolves in sheep’s clothing.  The clauses tend to render rent reviews as upwardly only – any decrease in RPI is more than likely to be discarded under the lease.  The veil is being lifted on these; many lenders will now insist on further investigation where there is an RPI clause linked to ground rents, with some smaller lenders refusing to lend at all.  As accord for RPI as a measure for inflation dwindles, its links to ground rents is also likely to dwindle, and it is perhaps for law firms advising developers to steer clients away from such clauses altogether.

Advice for homeowners

If you’re looking to buy a leasehold property, it is vital to listen to the advice of a good solicitor. If the ground rent under a long lease becomes, during the lease, more than £1,000 per annum in London or more than £250 per annum outside London, there could be a trigger for statutory regimes and the lease could be forfeited when the ground rent isn’t paid, which could obviously be a huge issue for homeowners. So you need to make sure that you’re on top of your ground rent payments - paying in full and on time.

The issue of escalating rents is also very much at the top of the government’s agenda. With negative opinion increasing, this has had a knock on effect on mortgage lenders. They are starting to see escalating ground rents in a less favourable light and are starting to refuse to lend against certain properties that have escalating ground rents above a certain rate. If you are looking to buy a property, your solicitor should be able to highlight if the escalating ground rents are unreasonable and advise to proceed with caution as potentially there could be an issue when you come to re-mortgage or sell the property, as it may be valued less than what it was bought for. Already, solicitors are having to refer some escalating ground rent clauses to mortgage lenders (and in turn their valuer) to determine whether the clauses have a detrimental effect on the mortgage offer.

Advice for developers

A good solicitor may also advise a developer that if they can sell the freehold of houses, and/or set ground rents more in line with their original intended purpose, a strong example is set for the rest of the market to follow - as well as a potential headache avoided should the legal reforms come to fruition.

Law Commission’s project on residential leasehold and commonhold

In February 2018, the Law Commission announced its proposals to investigate previous failings of commonholds, with a view to re-gearing the same as a way to side-step current leasehold issues. The Law Commission was aiming to look into lease assignments, with a view to seeing these as new contracts being formed between the freeholder and incoming leaseholder, so that any unfair terms can be challenged under the Consumer Rights Act 2015.  While the system is weighted as it presently is, developers may be keen to continue as they are.  And while, commercially, this may be beneficial at present, a good solicitor will inform clients of the direction leaseholds are heading – especially the number of measures both the government and Law Commission have proposed to tackle existing lease provisions. 

For example, in July the Law Commission published a variety of recommended reforms to make it easier for the owners of the estimated 4 million leasehold properties in England to “enfranchise” their leases and obtain full ownership of their homes.

Introducing a fixed formula for those looking to buy their freehold, of annual multiples of ground rent, as exists in Northern Ireland and Scotland is one notable proposal. Moreover, the Law Commission has examined a model that would set the cost of freehold at 10 times annual ground rent. It is also considering introducing longer lease extensions than the statutory 90 years.

This has been followed by a detailed consultation on a new enfranchisement regime in respect of leasehold houses and flats. We will soon see whether these solutions will be implemented retrospectively. But hopefully there will be some redress for people that have already purchased a leasehold property. The reforms and the proposal are welcomed and if implemented will be a much needed change for homeowners to ease the cost burden and simplify the process calculating ground rents.

There is a middle-ground to be found between notional and unconscionable ground rents, and developers may be well advised to show that they are capable of reaching this ground themselves, before such clauses are dispensed with entirely.

B P Collins’ residential property team will always keep their clients abreast of any future changes to ground rents to ensure home owners and developers have the most up to date advice. Every lease is unique and we will always tailor our advice to each individual case.

For more information, please contact the team. Call 01753 279064 or email resproperty@bpcollins.co.uk

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Email: enquiries@bpcollins.co.uk

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