Has Gove lost his grapple with ground rent?
Leasehold reform was on the agenda for peers this week, but outside Parliament, reports suggest that the Treasury has blocked the Secretary of State’s plans to charge peppercorn ground rent to leaseholders.
The Government committed to “improve consumer choice and fairness in leasehold” back in 2017.
Ground rent on most new leases was duly capped at a ‘peppercorn’ (zero) level some five years later, but it continues to be chargeable on existing leases.
The Secretary of State, Michael Gove, has – until just a few weeks ago – been vocal on his intention to extend the ‘peppercorn’ cap to existing leases as soon as possible.
A consultation outlining options to cap ground rent in existing leases was launched earlier this year and the NRLA sought members’ views before submitting a response.
However its now reported plans are being dropped due to concerns about its impact on freehold investors - and a potential breach of Article 1 of Protocol No. 1 of the European Convention on Human Rights (protection of property).
According to these reports, the plan may now involve restricting ground rent in existing leases to £250 per year and lowering the cap to zero over a period of twenty years.
At the time of writing, there has been no formal response from the Government, so this proposal remains unverified.
Would phasing out work?
On the face of it, a phased approach appears to offer something of a compromise. It could restrict exorbitant ground rent charges as soon as implemented, and offers an eventual route to abolition.
A positive outcome for leaseholders, albeit over a longer timeframe.
Yet, for freeholders, particularly those who derive even a modest income from ground rent, the plans could be disastrous. Some may opt to sell and may be forced to do so at a reduced price, given the lack of ground rent income is likely to make freeholds less valuable.
Concerns have also been raised regarding the plan’s impact on resolving building safety issues.
Liability for building safety defects is convoluted, but freeholders with remediation obligations could be particularly hampered by the ground rent plans.
Some suggest that the plans could incentivise lenders to demand early repayment of loans, placing extreme financial stress on freeholders and casting doubt on their ability to cover remediation costs.
What did the Lords debate?
Despite ongoing ground rent uncertainty, the committee stage debate got into the ‘nitty gritty’ of enfranchisement, access to redress and permitted leases.
Some social housing providers have cautioned that the reforms could have a detrimental impact on the shared ownership model (in which households can buy an initial share of a property and rent the remainder from a housing provider) and there was some consideration of this.
Lord Young of Cookham cautioned that the reforms risk 200,000 shared owners “falling between the cracks” since, as assured tenants, they will not benefit from the Bill’s enfranchisement provisions unless changes are made.
With three more committee stage sittings scheduled over the coming weeks and plenty more detail to be considered, the Bill remains very much in flux.
A key change that the NRLA is seeking to achieve concerns building safety. The Earl of Lytton has re-tabled his amendment to introduce a Building Safety Remediation Scheme which would ensure that building safety failures are fixed, irrespective of a building’s ownership or height.
The scheme would overcome the shortcomings of the Building Safety Act (and mitigate the issues linked to any ground ban) to fix historic safety defects via grants funded either by the developer responsible for the building works or through a levy on the construction industry where the developer is dissolved or insolvent.
As the Levelling Up, Housing and Communities Committee has stated, “buy-to-let landlords are no more to blame than other leaseholders for historic building safety defects and landing them with potentially unaffordable bills will only slow down or prevent works to make buildings safe.”
Committee stage continues on 29 April.
