In a survey of members of the Association of Leasehold Enfranchisement Practitioners (ALEP), 80% agreed with the statement that ‘residential ground rents can have a negative or undesirable impact on the sale of leasehold properties’.
As part of its wider leasehold reforms, the Government is currently running a consultation ‘Modern leasehold: restricting ground rent for existing leases’.
The consultation seeks views on limiting the ground rents that leaseholders are required to pay.
ALEP’s consultation, mirroring the Government’s, considered the potential negative impacts of ground rents and how they can be mitigated.
70% of member respondents said that some ground rents could cause problems in when selling a property, and 43.2% said that problems occurred because the full terms related to ground rent payments had not been made clear when the vendor purchased the property.
The consultation identified which of the Government’s proposals to rectify issue were most appropriate.
Members determined that the best potential solutions were capping ground rent at a percentage of the property value (38.6%), capping ground rent at an absolute value (27.3%) or capping ground rents at a peppercorn (20.5%).
Of these options, the Government’s stated preference was to cap ground rent at a peppercorn, effectively a notional rent that is not demanded or paid.
ALEP members believed that while this would significantly benefit all leaseholders, the impact would be disproportionately harsh on freeholders and investors who would experience an extremely negative impact.
Mark Chick, director of ALEP, said: “Ground rents currently provide a large source of stable income to not only investors but also pension funds and there is the potential if there were to be sudden, dramatic and wide-sweeping change for there to be knock-on effects in that part of the financial markets that seeks out fixed or stable income.
“There is a significant difference between capping ground rent at a percentage of the property value and capping ground rents at a peppercorn and so it is no surprise that ALEP members, concerned about the knock-on impact on the wider economy, favour the former.”
Given the potential financial damage that might be incurred by freeholders, it is unsurprising that 75% of ALEP members believe that if a ground rent cap was introduced, compensation should be paid to freeholders or intermediate landlords.
Were ground rents to be capped at an absolute value and taking into account all those impacted, the common preference among ALEP members was a value of £201 to £300 (15.9%), with 11.4% proposing a value of £101 to £200 and 11.4%, £401 to £500.
Alternatively, if the Government was to pursue to option of capping ground rent at a percentage of the property value, 45.5% believed that 0.1% of the property value was most appropriate.
Chick added: “It is encouraging to see that our members largely support the government’s proposals for changes to ground rents.
“However, our members’ answers have to be seen very much in the light of the way in which the questions posed by the ground rent consultation have been phrased.
“These are all very much focused on a single objective, namely, is capping, restricting, or abolishing all ground rents.
“When considering width of options available to government for reform in this area, one thing that our members might also wish to raise is the question of whether any reform or restriction could potentially be addressed at only the ‘problem’ ground rents (those doubling at intervals of less than 20 years, or where the level will become ‘onerous’ in a short timescale.”
He continued: “The work done with the Leasehold Reform Ground Rent Act 2022 shows that it is possible to draft quite precisely and cleanly to deal with ground rents for new leases.
“For legislation to seek to restrict or remove rents in existing leases (which may have been running for a good number of years) may run the risk of being disproportionate to the wider objective of discouraging ground rent and ultimately, leasehold as a form of land tenure.
“What seems clear is that the proposals outlined in the ground rent consultation will need to be discussed in further detail and will require further work before progressing to legislation. It seems clear from what we have seen so far that a ground rent cap probably cannot apply in all circumstances.
“Indeed, we have a clue in the draft Leasehold and Freehold Reform Bill and the proposed changes to the valuation mechanism that when calculating the ‘term value’ that the value of any ground rent received is to be treated as being paid at 0.1% of the capital value of the property regardless of the level at which it is in fact paid. This does tend to suggest the direction of the government’s thinking on this.”
Chick concluded: “It is very clear from the feedback that we received, that where serious issues have arisen, it is invariably the result of a lack of professional advice when purchasing a leasehold property.
“ALEP’s has worked constantly to seek to raise public awareness of these issues and to recommendation to anyone buying a leasehold property to seek appropriate professional advice to ensure peace of mind and avoid unexpected costs.
“As has been well documented, many of the worst issues relating to ground rents that flat owners have become subject to have arisen as a result of what might be termed an ‘advice failure’.”
