Government ‘to cap ground rent’ as plans to scrap leasehold abandoned
New rules on leasehold to be introduced after Michael Gove forced to U-turn on his pledge to scrap the system.
Leaseholders may only have to pay a ‘peppercorn’ ground rent under proposals being considered by the Government, it is reported.
Ministers have backed away from scrapping leasehold arrangements altogether as Levelling Up Secretary Michael Gove (main picture) had promised.
Legal complexities were blamed for the U-turn, and now the Government wants to cap ground rent at 0.1% of a property’s value, according to The Times.
Rules restricting the amount charged in service charges and a ban on commission for buildings insurance, are also said to be in the pipeline.
“I don’t believe leasehold is fair in any way. It is an outdated feudal system that needs to go. And we need to move to a better system and to liberate people from it,” Gove said in January.
But it appears that opposition from minister colleagues may have forced the change of policy.
Impossible
The complex rules of leasehold ownership made it impossible for the Government to abolish the system, according to the Association of Leasehold Enfranchisement Practitioners (ALEP).
Mark Chick, ALEP director and senior partner at Bishop & Sewell, says: “The news that Michael Gove intended to abolish leasehold garnered plenty of headlines at the time, but the reality is that there was never any realistic prospect of the leasehold system being scrapped during this Parliament.
Leasehold is an incredibly complex area of the law which has developed over centuries.”
“Leasehold is an incredibly complex area of the law which has developed over centuries, and it cannot simply be abolished or replaced overnight.
“We look forward to hearing further details of the next phase of the Government’s leasehold reform agenda in the King’s Speech later this year.”
As the article says, this is a complex area of law. The terms of a new or lease extended by deed of variation can be changed by legislation, but existing leases cannot be changed by government legislation. More than 20 years ago Commonhold Legislation was introduced. For new leases this would be a good solution in many cases. But whilst the idea of the individual flat owners jointly the freehold seems great on the surface, being then all invested in the maintenance of the building, which comes with cost, the reality is that all lessees are not with the same view or in the same financial position and there are times that a third party freeholder has benefits. All Michael Goves talk has meant that freeholders are now extending leases sooner and if you are selling a lease with less than 100 years you are having issues.
The hysteria over ground rents has caused enormous problems for holders of leases who hitherto did not have a problem.
I have a recent case where a ground rent of £275 linked to the RPI every 5 years needed to be varied to make it acceptable security for a lender. The flat is worth around £225k
It is clear evidence of this hysteria that a rent of seventy-five pennies a day can inflict so much damage to a properties value. Keeping the TV/computer and outside lights (LED) on at night costs me more than that in electricity
I suspect that a sun set clause could be put in place for ground rents – thus enabling the government to boast that it has removed the problem. It would soften the impact of the 10 years doublers and yet not have an immediate effect on landlords – they did a similar exercise with Rent Charges
Another possibility would be to make the landlord bear his own costs if they had acquired the interest post 1993 –
They could abolish marriage value but if the deferment rate was lowered from 5% to 4% most marriage value would disappear anyway – long overdue – at the time of Sportelli 2006 the risk-free rate was around 2.5% – as was the Ogden Rate. The Ogden Rate now stands at MINUS 0.25% so a 1% haircut from the Sportelli decision would not be an outrageous step – makes the calculation of the premium easier, and quicker and would deliver time and monetary savings in professional fees
Wondering if the delay is deliberate, so they come forward with marvellous news for leaseholders for it to fail as there is not enough parliamentary time to get it passed
There is the issue of human rights
You cannot simply abolish an asset stream without giving adequate compensation to the freeholder.
If you have perused a lease for two to three months before purchasing it, with the support of professional advisors, where the ground rent terms are set out in a schedule to the lease it seems very difficult to run an argument that the payment of the ground rent later on is unfair ad should be capped. The arguments that seem to be put forward are very weak:-
1) It is for no service – no, it is an integral part of the consideration for the deal as noted above
2) It belongs to a feudal system
3) It was written in legal speak, making it impossible to understand
4) There was no alternative but to agree to the rent
5) Nobody ever thought about the ground rent when buying, so the developer gets two bites of the cherry
In all but a very few cases is the rent a very substantial sum . And of course the larger the rent there more likely it was thought about at the time of purchase and factored into the price paid for the property
The idea that this country, which is regarded throughout the world as very stable and whose contract law has developed over centuries, should tear up or meddle with contracts on the basis of the arguments I have noted above seems incredulous
The root of the problem, is the failure to quantify at the time of purchase the financial burden that a ground rent places on a property. A ground rent of £7,500 per annum linked to the RPI is not a problem, PROVIDED that the flat is sold for around £225k less than one with a peppercorn – this could be achieved by requiring that the NPV of the ground rent is shown next to the premium being asked for the flat with the NPV being calculated using a defined rate set by the Government from time to time
The Government could deal with this very simply by saying ;
“All Residential Leases are automatically 999 years with Zero Ground Rent called Peppercorn “.
Steven Heath with over 40 years property experience in London .
Steven, and how would you propose to compensate the freeholders?
My view is that reform of the formula to calculate the premium for a lease extension or enfranchisement should still give the freeholder broadly the same as now.
The main area in which savings can be achieved to help lessees would be:-
1) If the landlord acquired their interest post 1993 then they should bear their own costs
2) There be prescribed rates for the capitalization of rents and the reversion
3) In an enfranchisement, the lessee or the freeholder should be able to take an overriding lease over the non participators. This would assist lessees and also the freeholder.
4) There be a prescribed deed of surrender and regrant form – only in exceptional cases should there be a departure from it. Thus reducing the legal and valuation fees a lessee has to pay
5) A ground rent could be reserved PROVIDED the NPV of the rent is calculated and shown clearly in the lease demonstrating that the reduction in the premium is due to the imposition of the ground rent
6) Marriage value removed but the deferment rate for leases under 80 years be in the range of 3.75% to 4%
7) Enabling a lessee to either eliminate or reduce the ground rent without increasing the term
8) Enabling a lessee to increase the term, keeping the same ground rent terms
9) Allowing a mortgagee to claim a statutory lease extension and the rights in 7 and 8 above. Thus making them feel easier about lending on a property with perhaps slightly higher than average rents. Giving them certainty that should they foreclose on the property, they can tidy up matters
A lessee can typically pay around £6,000 in costs in a statutory claim, their own plus the landlords and these proposals would indeed make it easier, quicker and cheaper. Yet at the same time uphold the principle that contracts should only be interfered with when there are serious and grave errors in lease.
A ground rent of say £1 a day linked to the RPI is not the work of the devil and it is incredulous that lenders believe that such an imposition can make a property not mortgageable . The government wishes to meddle and lower the lessee ground rent by 32 pennies a day to make it 68 pennies a day ( 250 per annum) – and will inevitably face a trip to Strasbourg to defend its actions. Notwithstanding, the contract was entered into by the lessee with the benefit of professional representation