Ground rent reform – a sledgehammer to crack the wrong nut

Ground rent reform – a sledgehammer to crack the wrong nut

10:16 AM, 7th December 2021, About 2 months ago 29

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This week, the House of Lords will scrutinise the Leasehold Reform (Ground Rent) Bill 2021-22. When enacted it will impose onerous penalties and yet it signally fails to tackle what most MPs and the public think is its main purpose.

Subject to some exceptions, it will become a civil offence to charge a ground rent of more than a peppercorn in any new lease of a single dwelling granted at a premium. The penalties are severe. Landlords can be fined a minimum of £500, and a maximum of £30,000. The Bill is meant to address the scandal of escalating rents, where initially small ground rents create serious problems for leaseholders. If rents double every 25 years, increases are roughly in line with the Retail Prices Index and are manageable. However, in recent years greedy landlord-developers of new builds have shortened the doubling period to 20 or even 10 years with dramatic effect.

Two major problems are caused by escalating ground rents. When the rent goes above £1000 pa in Greater London or £250 elsewhere, the tenancy becomes an assured tenancy and can be forfeited for some rent arrears. The courts have no discretion to grant relief from forfeiture. The landlord thereby receives a windfall. The lease becomes un-mortgageable and the property practically unsaleable.

The second problem is that rents doubling every 10 years will reach astronomical levels. A ground rent of £125 pa in a lease granted in 2021 for a term of 150 years, doubling every 25 years, will be £4,000 pa during the last ten years of the lease term. By contrast, if the rent doubles every 10 years the highest rent would be £2,048,000 pa and the total rent payable over the course of the lease will be nearly £41 million.

The Bill could easily amend the law so that such leases did not become assured tenancies – an easy change that nobody can reasonably object to. It could also put a cap on escalating ground rents.

The Department for Levelling Up, Housing & Communities knows that these are live issues but deals with neither of them. Instead, a landlord who grants a new lease with a ground rent of £5 a year fixed throughout the term may be fined up to £30,000 yet the landlord who holds or acquires the freehold of a lease with an escalating ground rent can continue to receive the benefit and can charge the leaseholder a substantial premium to vary the lease or can take the rent into account in an enfranchisement claim.

The Bill is a missed opportunity and a sledgehammer to crack the wrong nut.



Comments

by Blodwyn

10:58 AM, 7th December 2021, About 2 months ago

Have the appropriate representations been made?

by BernieWales

11:24 AM, 7th December 2021, About 2 months ago

This piece of reform is one hammer to smash just one nut. There are many more hammers proposed and many more nuts to crack.
And I think the main reason the Government shied away from changing onerous ground rents in existing leases ... is that meddling in an existing contract between two consenting parties, touches upon Human Rights and other such issues. The well-paid lawyers acting for large portfolio freeholders, would have great fun challenging such moves ... all the way to the Supreme Court probably.
The lack of ground rent income from new developments and new leases will significantly level the playing field so far as commonhold is concerned. That is a big goal for Government and has all-party support. This bill is a step in that direction and is to be welcomed ... even if there's more to do elsewhere.

by Stuart Mitcheson

11:59 AM, 7th December 2021, About 2 months ago

Do we expect that the costs to extend leases will fall as a result of this legislation?

by BernieWales

12:15 PM, 7th December 2021, About 2 months ago

Reply to the comment left by Stuart Mitcheson at 07/12/2021 - 11:59
No, we don't.

One of the other proposals is for the statutory +90 years extension to be changed to +990 years. But there's no detail on that and you won't get the additional 900 for free, I bet.

Also, the government has said it wants to change the formula for calculating lease extension premiums and Right to Enfranchise freehold values - but hasn't said what those changes will be. Consequently, we don't know if tweaking the yield rate or deferment rate or whatever, will be good or bad.

But the general thrust of the reforms is 'leaseholder friendly' much to the dismay of large portfolio freeholders.

Watch for updates on my website and in my newsletters.

by Ian Narbeth

12:22 PM, 7th December 2021, About 2 months ago

Reply to the comment left by BernieWales at 07/12/2021 - 11:24
Bernie, you may be right that that is the reason but since when has interfering with contracts stopped Government? The Tenant Fees Act 2019 outlawed fees in existing contracts albeit after a year.. The moratorium on evictions has meant that many landlords will not receive the rent they were contractually entitled to. The proposed arbitration over COVID arrears, if it is to have any teeth, must allow the arbitrator to cancel a rent obligation. If these are possible then why not limit future rent increases?

A compromise would be to allow increases from today's rent but perhaps no more than a fourfold increase. That at least would cap the ground rent. Ultimately leaseholders will have to enfranchise or else face bankruptcy and forfeiture of their leases.

As is common these days Parliament reaches for the £30,000 fine for landlords and then attaches an offence to it!

by BernieWales

12:42 PM, 7th December 2021, About 2 months ago

Reply to the comment left by Ian Narbeth at 07/12/2021 - 12:22
The safest way for leaseholders to deal with onerous ground rents, in my humble opinion, is to collectively buy the freehold and extend their leases at a peppercorn ground rent as part of the exercise ... or go for a statutory lease extension, which provides a peppercorn ground rent going forward.

And I wouldn't encourage leaseholders to wait for whatever the reforms will be ... because they may not arrive ... and waiting only increases the costs.

by NewYorkie

16:19 PM, 7th December 2021, About 2 months ago

Reply to the comment left by BernieWales at 07/12/2021 - 12:42
We must bear in mind this applies to England and wales only, because this feudal tenure has been ended everywhere else. Commonhold was introduced in England and Wales in the Leasehold and Commonhold Reform Act 2002, but the developers refused to adopt it because they would not have been able to monetise new leasehold properties, especially houses. Therefore, governments of all hues have conspired in this appalling exploitation of leaseholders.

It is so difficult to achieve RTE for a large block of leaseholders because many are absentees, and 'data protection' laws are used to make it extremely difficult and costly to obtain their contact details. I've been there! This plays into the hands of the freeholders who have vast legal resources to hand to frustrate the process. And I say 'frustrate' because that's what they do because the law says leaseholders are entitled to RTE and so the freeholders simply make it difficult and costly even though they know they will ultimately lose.

We have gone down the RTM route twice, which at least removes that other iniquitous 'scam'; service charges, from the freeholders' control, and should deliver significant savings and efficiencies to leaseholders.

The APPG on leasehold reform knows all there is to know about this abhorrence, and the Law Commission has made comprehensive recommendations to Government... https://communities.lawsociety.org.uk/property-news/law-commission-reports-on-reforming-leasehold/6001268.article which I hope will eventually come to pass. But the freehold lobby is powerful and doesn't want to lose it's golden goose.

by BernieWales

12:48 PM, 8th December 2021, About 2 months ago

Reply to the comment left by NewYorkie at 07/12/2021 - 16:19
All very interesting Mr Keyboard-Warrier.

I'll pick up on one point though - the cost of running a building correctly and cost-efficiently is not related to RTM or otherwise. The costs and requirements are the same whoever is controlling them - as they're dictated by the building and its needs. ARMA organised a survey of RFC, RMC and RTMCo service charges and found almost no difference in service charge costs per flat, whatever the legal set up. (But I doubt you'd believe an ARMA survey, would you.)

by NewYorkie

13:38 PM, 8th December 2021, About 2 months ago

Reply to the comment left by BernieWales at 08/12/2021 - 12:48
Firstly, I'm no 'Keyboard-Warrier' on this matter. Whatever ARMA may claim, I speak from bitter experience over 12 years, and as an ex-Company Secretary of a freeholder and a current RTM Co Ltd director.

Next, you claim 'the cost of running a building correctly and cost-efficiently is not related to RTM or otherwise. The costs and requirements are the same whoever is controlling them...' Wrong... in so many ways!

The millions in England and Wales who are exploited on a daily basis by freeholders and their managing agents will know just how costly that is, and how hopeless their situation can be.

I will list just a few salient points:
- Insurance, where the agent will often use an 'associated' broker to provide the most outrageous quotes, allowing for a 'kick-back' to the agent;
- Utilities, where the agent will enter into high priced contracts for supply, allowing for a kick-back to the agent;
- Contracts for work, where the agent will obtain multiple quotes but somehow ensure their 'favoured' contractor will win, allowing for a kick-back to the agent, and avoid giving the leaseholders the opportunity to obtain competitive quotes;
- Invoicing for service charges and ground rents after the event, and including small interest payments for 'late' payment;
- Disappearing or non-existent sinking funds;
- High management fees;
- Fire safety, the latest opportunity to exploit leaseholders
- Obtaining payments from leaseholders' mortgage providers under false pretences for charges in dispute...

I could go on!

But don't take my word for it, there's plenty of evidence at #NationalLeaseholdCampaign, who have worked tirelessly with the APPG on leasehold reform, the Law Commission, the CMA, and Leasehold Knowledge Partnership, and the media, to bring this #leaseholdscandal to the fore.

by BernieWales

17:36 PM, 8th December 2021, About 2 months ago

Reply to the comment left by NewYorkie at 08/12/2021 - 13:38
Two points ...

1. You have a profile picture of a little boy (which I suspect you're not) and a profile name that is not your name. That's someone who's hiding behind a screen in my book.

2. If you have evidence to back up your kick-back statements, then do the right thing and get an application sent into the First-tier Tribunal.

And I do read articles from those bodies you mention - and some of them read mine. We're not on opposite sides on all such matters.

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