On December 21st 2017, in response to their consultation on Tackling Unfair Practices in the Leasehold Market, the Ministry for Housing, Communities and Local Government (“MHCLG”) announced its intention to ban long-term leasehold for newly built houses. There was also a concerted effort to prevent exploitation of leaseholders by stopping onerous leases with aggressively escalating ground rents, the so called ‘ten and fifteen-year doubling’ leases by reducing all future ground rents to a peppercorn (equivalent to a zero financial value).
Reform of the long-leasehold market is necessary because of a lack of clear market-led regulation around ground rents which has in recent times led to onerous terms for certain long-leaseholders and ultimately homeowners.
The Government’s ongoing programme of leasehold reform is continuing and since the inaugural announcements:
- The Law Commission has published a call for evidence to “help make commonhold more common”.
- The Government remains under intense pressure to identify long term solutions to the challenges in the wake of the Grenfell tragedy around fire safety and unsafe cladding and alternatives for commonhold.
- MHCLG fielded questions from the Housing, Communities and Local Government Select Committee and were unable to respond to specific points raised around the unintended consequences of reducing ground rents to a peppercorn.
There remains substantial benefits to having a freeholder which is professionally managed but this is threatened by a potential ban on ground rents and/or their reduction to a peppercorn. For example, a responsible regulated freeholder plays a valuable role in protecting consumers by resolving issues relating to fire safety, ensuring properties are maintained in the long-term interest of residents and managing properties in a professional and efficient manner.
However, knee-jerk creation of mandatory residential management or commonhold systems to replace professionally managed freeholders could only serve to exacerbate the Government’s concerns.
Complexities of resident controlled management boards
Implementing a structure where residents are in full control of the management structure of a building – either through Right to Manage (RTM) or Residents’ Manage Companies (RMCs) raises serious concerns, particularly in relation to the management of communal areas for the long term, maintaining complex design structures and plant, resolving resident’s disputes, dealing with complex emergency situations and decisions being made by simple reference to cost rather than safety, deliverability and long-term value for money.
The impact of the elimination of ground rents:
- Impact on affordable housing
The elimination of ground rent will have an impact on a secure pipeline of affordable homes through Section 106 Agreements, including:
- Reduction in the supply of social and intermediate housing following the re-negotiation of Section 106 Agreements/CIL contributions following lower investment values for developers;
- Immediate stagnation in the supply of housing as Section 106 Agreements are renegotiated with local authorities therefore decreasing viability; and
- Increased sale prices as housebuilders seek to redress the loss of investment revenue that could result from the elimination of ground rents. This means housing is less affordable – consumers will need larger deposits or increased borrowing.
- Impact on development finance and land supply
The Government’s proposals could have an impact on the viability of future projects to be undertaken by a housebuilder. There has been limited debate to date about the impact of these reforms on housing supply and the cost of land itself.
There are concerns for investors, including:
- Reassessment of the development viability and affordability of residential and, in particular, mixed use schemes; and
- Increased premiums of plot sales to account for lost ground rent revenue.
There are concerns for developers, including:
- Investors/lenders less likely to provide forward funding for new housing developments if they are not guaranteed from the future receipts provided by ground rents;
- Ground rent on residential land provides long term index-linked income that provides an attractive yield for institutional investors, which allows housebuilders to bid higher on brownfield sites;
- Reluctance to construct complex developments with intricate M&E, as RMC/RTMs do not have the experience, resources or ability to take responsibility for managing such complex plant over the long-term.
- Impact on pension funds
The level of investments in ground rents, as a secured and lower risk investment grade matched liability for pension and life insurance companies, is significant enough to cause a potential knock-on effect. Investors have raised a number of concerns, including:
- Less safe and secure lower risk investments will be sought by institutional investors for investment of pension/life insurance contributions currently allocated to ground rents; and
- A significant pension fund deficit could arise if compensation is not provided for the removal of ground rent in the event of retrospective action from the Government.