Could ground rent be a goner?
While the Government’s proposals for leasehold reform progress through Parliament, linked plans to restrict ground rent on existing leases are just getting going. Senior Campaigns and Public Affairs Officer, Eleanor Bateman, outlines the key issues highlighted in the NRLA’s recent consultation response.
Following years of deliberation and inaction, the Government is at last advancing its leasehold reforms. The Leasehold Reform (Ground Rent) Act 2022 is in force, and the long-anticipated Leasehold and Freehold Reform Bill is currently being examined in committee stage. In the meantime, the Government has been seeking views on ground rent in existing leases.
Isn’t ground rent already restricted?
Ground rent is an annual payment made by a leaseholder to a freeholder. It is separate and in addition to the lease premium and has historically been set at a nominal amount, often a ‘peppercorn’ or zero financial value. However, in recent years this practice has changed, and the use of ‘escalating’ ground rent clauses has become more widespread.
The Government has, via the Leasehold Reform (Ground Rent) Act 2022, restricted ground rent in most new leases agreed after 30 June 2022 to a peppercorn, but ground rent in existing leases is currently unregulated, meaning a dual system is currently in place.
What is the Government proposing?
Five options are presented in the consultation paper, all of which restrict ground rent in existing leases to a greater or lesser extent, ranging from capping ground rent at a peppercorn to freezing it at current levels.
Strikingly, preserving the status quo was not proposed. At the Leasehold and Freehold Reform Bill’s second reading last year, Secretary of State, Michael Gove MP, made his preference on the proposals known, stating that “unless compelling evidence is produced” he believes ground rent should be restricted to a peppercorn.
Some have argued that capping ground rent to a peppercorn is, in effect, abolition rather than restriction, and the NRLA has cautioned that the impact of this – particularly on investment and property maintenance – must be monitored to ensure that leaseholders are not made worse off in the longer-term.
What is the NRLA’s view?
The NRLA’s chief concern is parity between new and existing leases to ensure that a simpler and more equitable system is put in place for all. Our latest member survey sought views on ground rent and leasehold reform more widely, and responses illustrated an overwhelming preference for ground rent to be capped at a peppercorn.
Notwithstanding the potential impact on investment, we believe restricting ground rent to a peppercorn will serve to protect leaseholders against punitive increases in ground rent as well as instances in which leaseholders pay for substandard or non-existent services. Some leaseholders may benefit significantly from such a move, and as well as making savings on ground rent could find accessing mortgage products more straightforward in future.
The other options under consideration, while less radical, would leave a two-tiered system in place, where pre-existing leases are less favourable, potentially impacting their market value. Critically, proposals such as freezing ground rent at current levels would not protect those worst affected by excessive hikes in ground rent.
What do the proposals mean for freeholders?
The Government’s preferred option is capping ground rent to a peppercorn. The impact this will have on freeholders is likely to vary depending on the extent of any ground rent income stream, and institutional investment may well decline as a result. The consultation document makes clear that freeholders will not be compensated for any loss of ground rent, though perhaps somewhat reassuringly for freeholders, suggests that ground rent paid prior to implementation of any cap will not need to be reimbursed to leaseholders.
If you are a freeholder of leasehold property and would like to help shape our leasehold reform campaign, please get in touch via [email protected].
