Government plans to reform ground rent in the leasehold property market

22 Aug 2019

Ray Oshry

It’s approaching 2 years since the Government published its response to the Tackling Unfair Practices in the Leasehold Market consultation outlining its plans to resolve the increasingly problematic issues surrounding ground rent in leasehold property.

Concerns regarding unfair rent escalation clauses, houses being sold as leasehold merely to profit off ground rent, and mandatory landlord-tenant evictions in (what is supposed to be) a homeownership tenure have gripped the media in recent years, keeping the plight of thousands of leaseholders in the public eye. As such, the response rate for the consultation was described as “overwhelming”.

The Government remains committed to reforming the leasehold market. These reforms include amending the Housing Act 1988 to tackle unfair ground rent clauses and also banning the sale of leasehold houses. Exactly when the reforms will be implemented is not yet certain, with a further technical consultation having taken place in October 2018 and reported on in June 2019. However, the scope of the reforms has become clear.

The problems with ground rent in leasehold property

Leasehold is no longer a narrow market catering only to flats. It’s estimated that 1 fifth of properties are now leasehold, including 1 million houses.

The Government hasn’t stated that leasehold should be abolished altogether, however, its current usage is flawed, resulting in insecurity, spiralling ground rents, and severe imbalances of power between leaseholders and their landlord freeholders. The following are just some of the issues associated with ground rent in leasehold property:

Assured tenancies under the Housing Act 1988

Despite being referred to as a “long lease”, if your lease meets certain conditions, namely:

  • The ground rent is more than £250 per annum (or more than £1000 per annum in London)
  • You’re occupying the property as your sole and principal home

Then it falls under the provisions on Assured Tenancies under the Housing Act 1988. It follows that, if the leaseholder falls into ground rent arrears of 3 months, then the landlord has a right to apply to court to repossess the property under Ground 8 of the Act. Ground 8 is a mandatory ground for possession which means the court cannot refuse.

This is problematic as Ground 8 has the potential to effectively erode leaseholders’ security of tenure. There is also no requirement under the Act on the landlord to notify any mortgage lenders, putting their security at risk and dramatically reducing the mortgage-ability and saleability of the property.

As it is becoming increasingly common for leases to include escalation clauses which cause ground rent to double every 10-15 years, more and more leases are being pushed into Assured Tenancy territory.

Most lenders are now reluctant to lend if, amongst other things:

  • Ground rents exceed £250 or £1000 in London at the start of the lease
  • The lease includes unreasonable multipliers (doubling every few years)
  • The ground rent exceeds 0.1% of the value of the property

There are some ways to work around these issues, however, none present a perfect solution:

Indemnity policies

Many lenders will provide security for a leasehold property subject to an indemnity policy which covers any losses they suffer. However, the owner of the property will generally not be covered.

Deeds of variation

A better solution is if the landlord agrees to vary the terms of the lease to limit ground rent to £1,000 per annum in London and £250 per annum everywhere else.

However, many landlords are reluctant to take this step unless paid a substantial premium plus their legal costs.

Leasehold houses

Another major problem with ground rents in the leasehold market relates to the unjustified increase of newbuild houses being sold on a leasehold basis for the purpose of profiting off ground rent.

Such leases will often contain doubling ground rent clauses which, within just a few years, can reach thousands of pounds per year, effectively making the property unmortgage-able and unsaleable. For example, an initial ground rent of £500 which doubles every 10 years will be £16,000 per annum within 50 years.

Lease extensions

Most leasehold owners have a statutory right to extend their lease by 90 years once they’ve owned the property for 2 years (and fulfil various other conditions). However, where the freeholder charges excessive ground rent and/or the ground rent increases substantially over regular periods, their freehold interest becomes significantly more valuable. The result is the leaseholder faces high premiums to extend the lease, and even higher costs to purchase the freehold.

Reforming ground rent in leasehold property

The Government now plans to reform the law on leasehold property ownership, including amending the Housing Act 1988. In July 2017 they opened a consultation, Tackling Unfair Practices in the Leasehold Market, the results of which were published in December 2017. Amongst broader reforms to the leasehold sector, the following measures have been planned:

Setting ground rents on new long leases at zero

Of those who responded to the 2017 consultation, over 40% stated that there is no justification for ground rent above a peppercorn value (zero financial value). This has already been recognised by the laws on lease extension which give leasehold flat owners the right to reduce their ground rent to a peppercorn upon extension.

While ground rents may cover landlords’ costs in some cases, it would be more appropriate to include these within service charges, which can be challenged by the leaseholder in court if deemed to be unreasonable.

The Government agreed that, while ground rents offered incentives to developers and investors, consumers obtained no benefit. Therefore, the plan is to set ground rents on all new long leases of flats and houses to zero.

Levelling the playing field for existing leaseholders

Respondents to the consultation commented that changing the rules on ground rent for existing leases could interfere with property rights. However, there was also a contention that many leaseholders did not understand their contract terms and, in some cases, may have been mis sold the lease. As the law currently stands, freeholders have a significant amount of power to include onerous ground rents and escalation clauses in leases which put leaseholders at a disadvantage.

The Government plans to provide more support for existing leaseholders, including providing substantial information on methods of consumer redress, for example, where their conveyancer has acted negligently.

There are also plans to amend the Housing Act 1988 to close the loophole which allows long leaseholders to be subject to mandatory Ground 8 evictions and potentially to limit ground rents on existing leases to £250 per annum (or £1,000 per annum in London).

Other plans include:

  • Regulating managing agents and tackling unfair service charges
  • Modernising the house buying process to address the specific challenges faced by leaseholders
  • Simplifying the lease extension process to make it easier and more cost-effective to extend a lease
  • Introducing a minimum term for new long leases on flats to protect leaseholders from excessive costs when the lease falls under 80 years

Banning the sale of newbuild leasehold houses

The majority of responses to the 2017 consultation argued for the outright ban of leasehold houses other than in very exceptional circumstances, such as shared ownership properties.

The Government agreed that there is rarely a justification for selling newbuild houses on a leasehold basis, the primary purpose being to sell to ground rent investors.

Leasehold owners are often surprised to discover the freehold of their property has been sold to a third party investor, particularly as leaseholders of houses have no “right of first refusal” to purchase the freehold for a reasonable price directly from the developer. As onerous escalation clauses cause ground rents to skyrocket, leasehold owners effectively become trapped in their properties as the costs of extending the lease or purchasing the freehold frequently amounts to tens of thousands of pounds.

The Government has therefore committed to implement a ban on long leases being granted on both newbuild houses and existing houses. There are also plans to introduce measures to support existing leaseholders affordably purchase the freehold to their property on more favourable terms than tend to be currently available.

What can landlords do in the interim?

1 ½ years after the 2017 consultation, the Government is still fleshing out their plans for ground rent and leasehold reform. However, in the meantime, there are many ways landlords can ensure ground rent provisions within their leases are appropriate for both tenants and their mortgage lenders:

  • Set ground rents below the Assured Tenancy threshold – £250 per annum or £1,000 in London
  • Cap ground rents to these thresholds
  • Limit escalation clauses to the RPI and no more than a 100% increase
  • Include lease provisions which require notice to be served on any mortgage lenders before commencing possession proceedings
  • Include lease provisions allowing the payment of any arrears before commencing possession proceedings

Do you need advice about buying or selling a leasehold property?

Are you looking to buy or sell a leasehold property? At Harold Benjamin, we offer comprehensive residential property services designed to make your home buying or selling experience as straightforward and stress-free as possible.

Our goal is help you make practical, informed decisions about the best way to proceed, minimising any uncertainty or financial risks.