The issue of escalating ground rents in the leasehold market has rightly come under scrutiny over the last few years. The industry has responded in several ways, including the Public Pledge for Leaseholders, announced by the Government in March, the variation of onerous leases for homeowners and the launch of the first ground rent-free development in London.
Steps need to be taken to ensure that residents are not paying high costs and unfair charges. But the universal roll out of ground rent-free developments cannot work as a universal model. Removing all ground rents, as the Government has proposed and confirmed in its recent manifesto, would drive out professional freeholders and leave consumers in a highly vulnerable position.
Since the Grenfell Tower fire tragedy in 2017, the residential housing sector has encountered a swathe of problems with building and fire safety. In the most recent Queen’s Speech, the Government set out much-needed reforms to resolve these issues which, if implemented, will mean a variety of new obligations and potential liabilities for those looking after apartment buildings.
But this appears to be two steps forward, then one step back, as those best able to perform this role are set to be removed.
The Building and Fire Safety Regulations Bill follows an independent review of the sector which quickly found that the regulatory system was unfit for purpose. This review has served to inform the Government’s proposals and, whilst these are undoubtedly welcome across the sector, it raises the question of who is going to take on these new obligations.
The Government is poised to introduce an ‘accountable person’ for apartment buildings, who will aim to keep residents safe and act as a long-term steward of the building’s life cycle. There are two options for who takes on this role: a professional freeholder, with the resource and expertise to perform the role; or resident-led management groups, who, in my experience, are likely to struggle to fulfil these obligations.
The latter is a problem. We must create a system that enables resident-led management groups to flourish in such a role, but there must be a safety net that ensures management responsibilities are picked up when these groups fail. Furthermore, with regards to highly complex, large and sophisticated buildings the option of a professional freeholder must be maintained when leaseholders are reluctant to take on the significant financial and legal responsibilities required.
Professional freeholders have the necessary expertise and qualifications to perform this stewardship role. But if the Government eliminates ground rents on all future leases, including on apartment buildings, they will no longer exist.
The intention of housing reform is to raise standards and protect consumers. Yet, not only would eliminating ground rents drive all future investment out of the market (therefore lowering standards), but it would create a two-tier market, rendering some leasehold properties unsalable. Whilst I do not think this is the Government’s intention, I do anticipate this to be the result.
There is a definite opportunity to implement meaningful reforms to the sector, and the industry is clear that the payment of a reasonable ground rent in return for the valuable services provided by a professional freeholder, under a properly regulated regime, is a far better, safer and cheaper outcome for consumers.
Michael Gaston is Managing Director of London-based property management firm Estates & Management which has over 2,000 properties within its portfolio.