Ground Rents, Property Tribunals And The Changing Property Landscape
The residential property market is continuing to face significant changes as the Government introduces reforms affecting both leaseholders and landlords.
Two recent developments highlight the potential consequences: M&G has criticised the Government’s proposed cap on existing ground rents after recording a significant write-down, while the number of residential property tribunal cases has risen sharply following the introduction of the Renters’ Rights Act, write Clive Scrivener MRICS and Zah Azeem MRICS, Partners at Wimbledon based Chartered Surveyors Scrivener Tibbatts.
Asset manager M&G has swung to a £165m loss for the first six months of the year, partly as a result of the Government’s plans to cap existing ground rents.
The FTSE 100 company recorded a £325m write-down against the value of its ground rent assets. Its core operating profit, which excludes the write-down, nevertheless increased by 15 per cent to £435m.
The Government has proposed limiting existing ground rents to £250 a year, with the longer-term intention of reducing the permitted charge further, potentially to zero.
M&G’s shareholder fund holds around £722m of UK ground rent assets. These provide long-term income streams which help fund future pension liabilities. The proposed cap reduces the income that can be generated from those assets and, consequently, their value.
Reported by CityAM M&G chief executive Andrea Rossi has previously said that the company was disappointed that it had been unable to agree a solution it considered proportionate.
The company has argued for an alternative approach, with a cap linked to the original lease terms and allowing inflation-related increases, rather than a blanket £250 limit which would eventually be phased down.
M&G said earlier this year that, while it supported the Government’s objective, it considered the proposed solution disproportionate. It also warned that the changes could affect savers and businesses investing in UK assets.
Despite the write-down, Rossi said that M&G’s financial position meant it was well placed to absorb the impact of the legislation.
The issue illustrates how changes intended to protect leaseholders can have wider consequences for investors and the institutions whose assets ultimately support pension savers.
Property tribunal cases increase
There is also evidence of growing pressure elsewhere in the residential property system.
Analysis of Ministry of Justice figures by Savills shows that 4,613 residential property tribunal cases were received between April and June – a 56 per cent increase on the same period last year, when just under 3,000 cases were recorded.
It is important, however, not to attribute the whole increase to the Renters’ Rights Act. The principal tenancy reforms came into effect on 1 May, meaning the latest figures cover only two months under the new regime.
Over the 12 months to the end of June, 15,929 residential property cases were received, representing a 24 per cent increase on the previous year. This suggests tribunal activity was already increasing before the new legislation came into force.
The Ministry of Justice’s residential property category covers a broad range of matters, including rent disputes, leasehold enfranchisement and disputes, Housing Act 2004 cases and park homes.
For landlords, however, the focus is increasingly likely to be on rent disputes following the abolition of fixed-term assured shorthold tenancies and the introduction of the new rent increase process.
Under the new rules, landlords must follow the statutory procedure when increasing rent, while tenants can challenge proposed increases at the First-tier Tribunal.
Savills expects this to result in more cases being referred as landlords and tenants become familiar with the new system.
Capacity could become an issue
The capacity of the tribunal system will therefore be something landlords and tenants will want to watch closely.
A substantial increase in applications could create a backlog, potentially delaying decisions on proposed market rents. For landlords, that could have implications for when a revised rent can actually be charged.
The Government will also need to consider the administrative cost of handling a greater number of cases and whether the regulations need to be adjusted as experience of the new system develops.
The Ministry of Justice has indicated that it intends to publish more detailed information about the tribunal cases affected by the Renters’ Rights Act. The first full quarter following implementation – covering July to September – is due to be published in December.
That data should provide a clearer indication of how much of the increase is attributable specifically to rent disputes.
A changing regulatory landscape
Both developments demonstrate the wider challenges created when significant changes are introduced into the property market.
For leaseholders, the ground rent reforms are intended to reduce an ongoing cost. For landlords and tenants, the Renters’ Rights Act is designed to change the way residential tenancies operate.
But regulation can have consequences beyond its immediate objective – affecting investment values, pension funds, landlords, tenants and the capacity of the systems needed to administer the new rules.
For property owners and investors, keeping abreast of these developments is therefore becoming increasingly important. The detail of new legislation can have a direct impact on the value, management and future use of property.
At Scrivener Tibbatts, we advise clients on a wide range of property matters, including leasehold, landlord and tenant issues and disputes. As the regulatory landscape continues to evolve, obtaining appropriate professional advice at an early stage can help property owners understand both their obligations and the potential implications for their assets.
If you would like to discuss something related to a property valuation, specifically a Lease Extension, Freehold Valuations and Market Valuations for disputes, please contact Clive or Zah direct via email at clive@scrivenertibbatts.co.uk and zah@scrivenertibbatts.co.uk or call 020 8947 7040.
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