Leasehold reform: Striking a balance for fairness and sustainability in the housing sector

The announcement of the Leasehold and Freehold Bill in the King’s Speech was clearly a landmark moment for the sector, not least for all leaseholders themselves and all those stakeholders – including the CA – who have long-campaigned for their rights.

To say we were relieved to see this Bill in the King’s Speech would be something of an understatement. The biggest positive is greater fairness, transparency, and less costs for those leaseholders who should now find it a lot easier to extend their lease, or buy their freehold, while having set fees and turnaround times for LPE1 and FME1, and at some point in the future, having their ground rents set at what we hope is a reasonable level.

Which brings me onto what followed very quickly after the King’s Speech, a consultation paper on the Government’s leasehold reforms, specifically on ground rents.

The CA is currently working on our response to this leasehold consultation paper which “sets out a series of options for how the Government could intervene to cap the ground rent leaseholders have to pay”. We have to respond by the 21st December on the options the Government is considering, namely:

  • Capping ground rents at peppercorn.
  • Setting maximum financial value for ground rent.
  • Capping ground rents at a percentage of the property value.
  • Limiting ground rent to the original value when the lease was agreed.
  • Freezing ground rent at current levels.

At the moment, the obvious answer to that question is to say the Government should cap ground rents at a peppercorn level. However, my own guess is that implementing this right across the piece is likely to take decades to achieve, which is clearly not ideal.

It absolutely does require a capping of rents, not least because currently there is no equality between landlords and leaseholders. Landlords have arguably organised their business models, and the financial future of those models, on the basis of the ground rents which leaseholders have already signed up to.

The issue therefore becomes one of whether these rents are reasonable, and where they are not, the leaseholder has been mis-sold. What we don’t want is the landlord taking the lease into ASTL/Housing Act territory, creating additional grounds for possession for the landlord, in derogation of the original grant of a long lease.

By capping those ground rents, we establish equality, however Lease Administrators may then charge an administration fee for collecting the ground rent, which has no jurisdiction in the Property Tribunal, and without the Regulation of Property Agents (ROPA), will no doubt escalate to replace the ground rent lost through capping.

It’s why missing ROPA out of the Leasehold and Freehold Bill is such a big issue, because without this, as noted above, there will be nothing to stop property managers and Lease Administrators from putting profits over the welfare of these homeowners, and seeking to recoup those lost ground rent costs elsewhere.

We have campaigned extensively for ROPA, quite simply because if there is regulation, and those agents had to be trained to provide the correct management of the estate, without charging an unreasonable fee, we would bypass a lot of the problems that might well continue.

In terms of combining both the Consultation options and ROPA together, at the moment, I would be leaning towards capping ground rents at Housing Act levels as this overcomes the Landlord’s claimed human rights issue; as to go over these levels would create an Assured Shorthold Tenancy in derogation of grant of the long lease, this clearly makes it more affordable for the leaseholder plus it also improves the ability to (re)mortgage the property.

Or – and this is perhaps easier to deliver in a shorter timespan – you regulate property agents, and require that either no fee or a reasonable fee, set by the Secretary of State, can be charged for collecting the ground rent, plus make forfeiture of the property for non-payment of the rent unenforceable. It can’t be right that a leaseholder might have to forfeit an asset worth hundreds of thousands of pounds for failure to pay a few hundred in ground rent.

We might also say there are positives for those freeholders and landlords of a peppercorn ground rent, although they might well argue the loss of income far outweighs these. However, there would be a reduction in the cost of enforcement for failure to pay ground rent and administration in collecting it in the first place; they won’t have any costs in having to deal with conveyancers asking questions about the confirmation of receipt of ground rent; and it also avoids having to provide a receipt for ground rents as low as a few shillings or a Guinea.

As mentioned, they might not consider these particularly onerous burdens, as up until now their ground rent levels will probably have far exceeded any costs mentioned above.

What they will ‘suffer’ is a loss of the financial value of the ground rent; a loss of the ability to charge leaseholder costs for administration of chasing missed ground rent payments; a loss of the ability to obtain costs dealing with correspondence when leaseholders are defending forfeiture demands; a loss of premiums and costs charges for deeds of variation to the make the lease sellable or mortgageable; and a loss of premiums charged for the lease extensions.

That is the big financial hit for them, and you can see why they might wish to move down another route, or we have to be careful about the ways and means by which they might seek to recoup that lost ‘income’.

Overall, we have some weeks remaining before the consultation response is required, and we would like to hear from conveyancing firms about their views on this consultation, and the option they are most inclined to support. It is an important consideration and one that takes us further along the road to greater fairness for leaseholders.

 

Beth Rudolf is Director of Delivery at The Conveyancing Association

2 Responses

  1. No ground rent, no freeholder, no management/oversight, no mortgage security.

    Let’s also not forget it was largely conveyancers who signed off on what are now deemed problematic leases, in many cases multiple times via remortgages and resales.

  2. How can you prove that the ground rent is for “no service” and therefore make the case for it being capped at a peppercorn without any compensation being paid to the freeholder?

    We know in a non-statutory lease extension where the parties are very focused on the two alternatives of paying a higher premium in return for no ground rent as opposed to a lower premium with a ground rent. Then in a non statutory lease extension it would be unfair to cap the rent at a peppercorn some years later as the freeholder took a lower premium in return for a promise by the leaseholder to pay the rent.

    Therefore, to prove that a ground rent is for “no service “when the flat is first built and sold you would need to ask for a very detailed calculation of the cost of building the flat, and then add an acceptable profit figure. If the total is less than the premium plus the capitalised value of the ground rent paid at the time, then you start to have a case against the freeholder for a refund of part of the premium or a cancelling of the ground rent.

    If this succeeds it would open the possibility of numerous claims on other purchases cars, restaurant bills, clothes etc etc

    I am of course being sarcastic but I hope illustrates how ridiculous it is to ignore the fact that the rent is an integral part of the deal a developer/freeholder puts forward when they wish to sell the property

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