The problem with scrapping ground rents
It was widely reported this week that Michael Gove, the Secretary of State for Housing, has been forced to water down the reforms in the Leasehold and Freehold Reform Bill following resistance from the Treasury, according to reports in the Times, and elsewhere, writes Clive Scrivener, Partner at Wimbledon based Chartered Surveyors.
There are an estimated 4.98 million leasehold properties in England, according to Department for Levelling Up, Housing and Communities data published last May, which is 20% of the English housing stock.
Annual charges levied on leaseholders will now be capped at £250 rather than being cut to zero, or “peppercorn” rate, as first outlined in the Conservative 2019 manifesto.
But whilst this might be seen as a win for leaseholders, as was reported here in CityAM the unintended consequence is that for those who have invested in ground rents reforms to the ground rent system could cost those investors billions of pounds.
Many of these investors are not money grabbing, exploitative rich entrepreneurs but pension funds, who as cautious, long-term investors with expectations of secure income to pay the policies of their pensioners now and in the future, now find themselves out of pocket to the tune of £40 billion, according to the report in CityAM.
They also report an investment trust – that was specifically set up to invest in ground rents – has seen its net asset value slashed by around a quarter as it has started to factor in Michael Gove’s proposed ground rent reforms.
The value of Ground Rent Income Fund’s portfolio has fallen to just £81.5m, with 97 per cent of the drop being attributed to uncertainty over both leasehold reform and building safety reform, it said: “This consultation represented a significant shift in the Government’s approach to leasehold reform and has led to a pause in market activity and negatively impacted values.”
No one disputes that some leaseholders are trapped by onerous ground rents that are either doubling or increasing in line with inflation, costing them thousands a year.
We agree with our fellow ALEP member, Mark Chick, a partner at law firm Bishop & Sewell and a director of the Association of Leasehold Enfranchisement Practitioners, who suggests that the reforms could leave the government open to “significant compensation claims”.
“Some will say that this proposal does not go far enough, and that the government should be aiming for a complete ban on ground rents.
“However, it seems very clear that the human rights considerations have been taken into account in coming to this proposal – and the realisation that a complete ban would more likely than not to lead to significant compensation claims having to be paid.
“The government no doubt wants to avoid having to pay a reported £27.3bn to compensate freeholders for lost assets.”
Whilst it is suggested the £250 cap will be phased out over time, it’s uncertain how long this will be. Will the reduction be down to zero? Many ground rents in London are significantly above £250, so freeholders will feel with some justification that this legislation has wiped out their long-term value and income.
This story still has a long way to go.
If you would like to discuss something related to a property valuation, please contact me direct via email at clive@scrivenertibbatts.co.uk or call 020 8947 7040.
