Clarity needed on Leasehold and Freehold Reform Bill report

Last weekend a story by The Sunday Times’ Deputy Political Editor indicated that the Government is proposing implementing a £250 cap on all existing ground rents followed by a ‘phasing out’ over time.

Almost a week on, we have heard nothing from Government on this topic and in the meantime the thousands of investors whose main income is from freeholds face an uncertain future.

ALEP (the Association of Leasehold Enfranchisement Practitioners) is a professional body representing over 1,200 solicitors, barristers and surveyors who work in leasehold enfranchisement and have experience of dealing with ground rents from a variety of perspectives. Right from its very beginnings ALEP has sought to engage with Government since its inception in 2008, with its initial ‘list’ of potential reforms.

The proposed ground rent reforms are likely to be added to the proposed Leasehold and Freehold Reform Bill – a substantial piece of legislation which is being rushed through Parliament with unusual speed. The issue of ground rents is itself substantial and requires some careful consideration.

Earlier this year ALEP conducted a survey in which 81.8% of members agreed with the statement that ‘residential ground rents can have a negative or undesirable impact on the sale of leasehold properties’. Our consultation, mirroring the government’s, considered the potential negative impacts of ground rents and how they can be mitigated.

Made clear

70% said that some ground rents could cause problems 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. Clearly there is a need for change.

But, returning to the recent speculation, is a £250 cap and a gradual phasing out the answer? I will address the two points of anticipated change separately.

First, phasing out: does this mean that there will be a ‘sunset clause’ for all ground rents – meaning that all current ground rents will fall to zero in say 20 years’ time?

Second, it is speculated that during that period – i.e. from implementation - that all ground rents will be capped at £250? If that is the case, does the £250 cap apply everywhere? Or will there be a differential for say, Central London – mirroring the Housing Act 1988 provisions?

What does this mean in terms of the Government’s overall objective for the Bill, that of making leasehold ‘cheaper and easier’? There is some ambiguity in the statement: ‘It would make extending the lease term or buying the freehold more expensive for the leaseholder, because they would have to compensate the freeholder for income lost.’

Clearly not implementing an immediate shift down to zero ground rent would make it more expensive to extend or buy the freehold, but we have to bear in mind that a complete ban is not the current position. Therefore even a shift to £250 would provide a saving for all those whose rents are over that amount and in addition, the prospect of a sunset date (if this is correct) would also reduce the amount payable as the ground rent stream would only last for the next 20 years (or whatever the ‘phase out’ period might be).

This also ignores the fact that in the draft Leasehold and Freehold Reform Bill it is assumed that ground rents would not exceed 0.1% of the capital value of the property: another factor which on its own would make it ‘cheaper’ to extend or buy the freehold.

Falling foul

Clearly some further clarification is needed. We hope to receive that next week, as the House of Lords continues debating the Bill on 2 May.

It will be interesting to see how this sits in comparison with the human rights points that have been discussed in relation to this matter. A number of senior legal commentators such as Professor Susan Bright form the University of Oxford and also Douglas Maxwell of Henderson Chambers (author of ‘The Human Right to Property’ a leading practitioner text on the subject) have indicated that a complete ban on ground rents is likely to offend the Human Rights legislation. That is because in such cases, whilst the state is generally seen as having the right to interfere with private property ownership rights to achieve a wider objective, if it does so, it must balance what is seen as ‘the control of the use’ of such assets with what might amount to a ‘deprivation’ of the property asset itself. If this were to happen compensation is likely to be payable. A complete ban on all current ground rents runs the risk of falling foul of this. 

Importantly, we hope to see the rationale behind this thinking in the Government’s response to the Ground Rent Consultation. The consultation closed in mid January and its outcome is eagerly awaited as the industry grapples with considerable uncertainty.