Everything you need to know about the government’s ground rent review

The government revealed this week it is consulting on banning the sale of new-build homes as leasehold properties in an effort to crack down on what one commentator called “property’s PFI”. The furore around the monetisation of ground rents and their increases – some will be in excess £10,000 pa – means the government now intends to ban them, with the DCLG’s Sajid Javid saying he wants to put a stop to the “unjust” practices. Anthony Essien, chief executive of the Leasehold Advisory Service, explains what is being proposed and what the changes mean for residential development. What is the current furore and consultation about? It is about consumer detriment and the detriment of new-build leaseholders particularly and their ground rents. What has happened is that ground rents have been taken to be monetised. Why are some homes sold as leaseholds rather than freeholds? There are a variety of reasons. In some places the practice is traditional, in other places it is because of the nature of the piece of land on which the property is built – a cathedral precinct, for example. In other cases, as now perhaps, there is a preference for leasehold houses because of their investment potential. The BoE lending rate is 0.25%, but some of these yields or returns are approaching 7-8%, and therefore investors see these as making good sense. What are the advantages to selling leasehold, not freehold? It hard to see anything other than the investment, or if the property is in a unique place. What is the government proposing? A range of things. It is asking about what to do in terms of ending new-build leasehold. And it is looking to make changes to the Help to Buy equity loan scheme, so that it is not applicable to new-build leasehold houses any longer. But there are other things as well: service charges on freehold houses, limits on starting rent and rent increases on a leasehold house or a leasehold flat, and a few other things just to tidy things up regarding unforeseen consequences. But for the moment it is just a consultation? It is indeed. But we have to remember that back in April the prime minster gave a pretty strong statement about the government’s intentions regarding leasehold houses. If I paraphrase, she said there was no realistic basis in which you should have leasehold houses on freehold land. Which is a pretty strong indicator of where the government is looking to go. Why is the government doing this? It is about consumer detriment. There is no law that controls ground rent and how high it can go. Though historically ground rents have been low and increased in reasonable ways, now the starting figures and the gap between the increases are much shorter, and that has meant that many people are facing the prospect of paying substantial ground rents quite soon, which affects the sale of the property. While the 1967 Leasehold Reform Act does provide ground rent tenants with rights to buy the freehold to their property, it means the cost of buying that freehold, which has to take into account the value of the ground rent, is pretty substantial. Why has there been no regulation in the past? It is hard to see why it has not been regulated. I suppose it is because the consumer detriment hasn’t become apparent. These things have come to light only through the work of organisations and pressure groups and the All Party Parliamentary Group. How will these new regulations affect housebuilders? I am not an expert builder by any means, but if there is leasehold development in the pipeline aimed at similar sorts of ground rent packages, I think these have to be reconsidered, no question about that. How will it impact on the apartment sector, where leasehold is more commonplace? There too, if there are escalations of ground rent, the government has made a clear proposal that their starting point would be for new leases to carry a peppercorn ground rent. What are the options for those already sold? That is the question that the government is asking now. It is looking for suggestions and solutions. The government highlights that in April this year Taylor Wimpey announced a package intended ostensibly to assist those in that position. Looking at what has been said subsequently, it is not apparent that this move is necessarily satisfactory to leaseholders in that situation. What should developers do? They need to get as much information as they can, and see what their trade bodies have in mind. It looks like ground rents and its monetisation for leasehold property has been highlighted as providing massive consumer detriment, and that needs addressing. What are you recommending? We support wholeheartedly these changes. They are about people’s homes, many of them bought by first-time buyers using the HTB equity loan scheme. Many of these people, through one reason or another, were not informed sufficiently about these ground rents and increases. In some cases they were told they would be able to buy their freeholds, and these were then sold on without reference to them, without any right of first refusal. This is now plainly an area of consumer detriment, like so many others in residential leasehold that need to be addressed. To send feedback, e-mail alex.peace@egi.co.uk or tweet @egalexpeace or @estatesgazette