CoStar Column: Ground rent reform

By Paul Norman - Friday, September 14, 2018 14:18

Over the past year, ground rents - the rents applied by developers and landlords for the land beneath leasehold properties - have been under intense scrutiny due to the rise in unfair leasehold practices, which have seen some homeowners’ ground rents rise from small sums, to hundreds or even thousands of pounds per year. Will Agnew, senior surveyor, at Colliers says the debate around reform is shaking the foundations of housing development.

While the system of leasehold property ownership is in fact a relic of feudal English property law dating back to the 11th Century, the modern leasehold system has been steadily on the rise in Britain since the early 20th century. Long leases (99/125 years) were first introduced by cash-strapped 1920’s landlords and the proliferation of flats in the 1950’s made freehold ownership unsuitable and today this type of home ownership is deemed quite normal.

The ground rents applied to leasehold properties enable developers and landowners to maximise profits. More recently, landowners have begun to stipulate in home owners’ contracts that ground rents can increase, uncapped at their discretion. This has left many homeowners locked into their mortgages, unable to remortgage or sell their homes. This issue could evidently create huge bills for future proprietors and may even prevent new buyers from getting a mortgage.

At the end of December 2017, the Government Consultation published a whitepaper, ‘Tackling unfair practices in the leasehold market’, which was due to provide an insight into its plans to address onerous ground rents this year and beyond. However, the proposals did not really go far enough to remedy the issues and as yet, no legislation has been introduced. The Government has said that it would introduce laws to restrict new residential long leases on both new build and existing freehold homes; set ground rents on new house and flat leases at zero (a peppercorn rent) and enforce legislation against the loophole which deems spiralling ground rents acceptable.

The proposed prohibiting of future houses being sold as long leaseholds was set to apply to all houses apart from a few exceptional circumstances where a leasehold is still needed, such as houses that have shared services or those that are built on land with specific restrictions/covenants. However once again, no announcement has been made with regard to whether these changes will exclude flatted developments or whether these proposed reforms will affect all new build dwellings across the UK.

Furthermore, the RICS has also not produced any formal guidance or advice on the topic and no timescales have been set by the government for an announcement on this issue.

This confusion surrounding ground rents is creating a grey area for developers, landlords and consumers. From a commercial property perspective, the lack of transparency could have a lasting delay on the delivery of consented development sites within the UK. In addition, currently, ground rents are not being factored into Gross Development Value calculations by the majority of residential development professionals, owing to further uncertainty surrounding whether this tax will be abolished or restricted. Moreover, the majority of ‘red book’ valuers have ceased factoring in ground rent investment income into their valuations on account of the delayed legislation released by the government.

Typically, ground rent investment valuations account for 1-2 per cent of gross development value. With house price growth plateauing in London at present and vendors’ aspirations not reflecting legislation changes to the housing market, this change makes land purchases within UK more challenging – particularly in the capital.

Should developers (the purchasers) successfully sell off ground rent investments or if the government sets a peppercorn ground value on all future ling leaseholds the future, we would suggest that recommendations on clawback overages to vendors will enable them to offer an additional payment whilst also protecting the landowner’s interests downstream.

For now, the Law Commission is said to be looking into future proposals to best protect landlords and consumer’s rights but one thing’s for certain, until anything concrete is determined, buyers and sellers will continue to be blighted by uncertainty.

Will Agnew, senior surveyor, Colliers

 

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