This week’s Legal Update touches upon the Government’s recent announcement concerning the launch of a consultation that seeks to restrict ground rents set out in current residential long leases.

The background

The term “ground rent” in the residential property management world is often seen by leaseholders as a dirty word. Whilst ground rent is a fee paid to the freeholder of the land upon which their home sits, leaseholders see it as a payment for nothing in return and for no other reason than to swell the pockets of Landlords under what they say is an archaic means of land ownership.

Non-payment of ground rent under a residential lease can lead to the Landlord exercising their right to forfeit the lease and gain a significant windfall based upon unpaid sums that are often, not always, very low in amount.

Furthermore, it became apparent a number of years ago that certain property developers were inserting such onerous ground rents into leases that increased at significant rates over the term that the amount would be unaffordable and which lead to homes being unable to be sold and mortgagees refusing to lend to customers. The fall out here resulted in many developers and Landlords assisting leaseholders with voluntary variations to their leases to ensure that the ground rents remained fair amounts. 

The consultation

Ground rents and the Landlords that receive them, have been on the Government’s radar for a number of years. It was only last year that The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022 and which banned the sale of new residential leases that incorporated a ground rent. Our Legal Update on the issue can be seen here.

So, whilst the Government has already taken steps to stop new ground rents from coming into existence, they now want to regulate those leases currently in existence where a ground rent is payable. The Department for Levelling Up, Housing and Communities has launched a consultation that does just that! The consultation can be seen here.

The consultation is a lengthy document but in summary, the proposals set out a five point plan and which are:

1. Capping ground rents at a peppercorn i.e. zero;

2. Capping ground rents at a maximum value;

3. Capping ground rents at a percentage of the property value;

4. Capping ground rents at the original amount it was when the lease was granted; and/or

5. Freezing ground rents at current levels.

Needless to say, the consultation is being heralded by leaseholders across the country and rightly so, who wouldn’t be happy with the prospect of saving money in the current economic climate and to also feel content in their homes. However, pushing any of the proposals through parliament will not be an easy task and it is anticipated that there will be some quite aggressive litigation being fought by those parties effected - the Landlords.

Impact upon Landlords

Landlords that have invested millions of pounds into ground rents based on a projected return under the terms of the leases in their current form, stand to lose huge sums of money. Whilst leaseholders and other homeowners are unlikely to have much sympathy, what is often missed is that pension funds are frequent investing parties given the projected incomes that can be achieved through ground rents so it should not come as too much of a surprise if pension pots are hit should the Government succeed with their wishes.

The Government will likely be advised that they must proceed with caution, however they plan to press ahead. When the consultation was being mooted in late spring, The Residential Freehold Association (“The RFA”) were quick to respond. The RFA’s reply can be seen here.  

One would think that the Government’s plan would amount to an unlawful interference with existing property rights but further, they are potentially meddling with the principle of freedom of contract, something that historically the Courts will not involve themselves with - they tend not to assist any party that has entered into any perceived “bad bargains”.

Conclusion

Subject to the extent of any restrictions on current ground rents, it is almost certainly going to result in professional Landlords leaving the leasehold sector. Leaseholders will see that as a triumph but a point that is often missed, especially in the world of building safety, is that professional Landlords have the resource to make buildings safe when needed to be called upon whereas most leaseholder owned freehold entitles do not.

If changes are made, Landlords will need to be compensated for their loss. Who compensates that loss and how it would be calculated, remains to be seen but care needs to be taken to ensure that any changes to the current ground rent regime suits all parties.

This will be an interesting issue to follow though.

For more information, please feel free to contact a member of the team on 01435 897297 or info@kdllaw.com.

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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