Contributors
The government issued a consultation on 9 November 2023 to look at restricting ground rents in existing residential leases.
Ground rents in new residential leases were restricted to a peppercorn per year by the Leasehold Reform (Ground Rent) Act 2022. Ground rents in leases which take effect from 1 July 2022 (or 1 April 2023 in relation to retirement home leases) have therefore effectively been abolished.
The consultation is looking to take this further by looking at ground rents in existing residential leases entered into prior to the above dates.
The consultation suggests five possible options:
- Capping ground rents at a peppercorn
- Setting a maximum financial value for ground rent
- Capping ground rents at a percentage of the property value
- Limiting ground rent to the original value when the lease was agreed, or
- Freezing ground rent at current levels.
If ground rents in existing residential leases were capped at a peppercorn, the government estimates that leaseholders could save a combined £5.1 billion in ground rent over 10 years.
So what’s the problem?
If ground rents are capped or removed, it then becomes questionable whether landlords will want to continue to manage estates. Ground rent is the incentive for some landlords to provide services such as issuing consents or Land Registry compliance certificates. Landlords may become absent or unresponsive.
Alarmingly for these landlords, the government estimates that in addition to the lost ground rent income stream, such landlords face a £27 billion loss in asset values.
However it might not be the perfect solution for the leaseholders either. If ground rents are reduced or capped, in a tiered lease scenario where there is an apartment lease, followed by a building lease, there could be insufficient ground rent provided by the apartments to pay the headlease ground rent. The headlease could then be forfeited for non-payment of rent and the apartment owners would need to apply for relief from forfeiture.
Some savers may also be at a loss as pension funds have historically invested in ground rents as the predictable nature of long-term income streams from ground rents are attractive.
A response from the government following the consultation is awaited. It remains to be seen how the balance will be tipped and whether leaseholders, freeholders or anyone will be happy with the result.
