By Mary-Anne Bowring, group managing director at Ringley
Ground rents are once again in the news after Aviva promised to amend the properties it sells leasehold to stop ground rents from doubling and Persimmon pledged the owners of leasehold houses could buy the freehold of their home at a discount.
The commitments, which have been secured by the Competition and Markets Authority, are a victory for common sense and consumers. Family houses had no reason to be sold as leasehold properties, and the doubling of ground rents was an act of unjustifiable greed that has tarnished our industry.
Understandably, the government wants to be seen taking action to protect consumers. Yet the flagship policy of its Leasehold Reform Bill – capping ground rents for new-build properties at zero – risks failing leaseholders further.
Introduced to Parliament in May, the Bill creates an offence to ask for payment of ground rents on new regulated leases unless there is evidence of shared ownership. Freeholders that continue to charge ground rents in contravention of the Bill will face fines of up to £5,000.
While no more ground rents may sound good superficially, the risk for leaseholders is where apathy prevails and leaseholders do not want to take responsibility for plant compliance, insurance rebuilding risk or covenant enforcement particularly on smaller new-build blocks where there are less people to draw expertise from – who will take an interest in the condition or maintenance of the building if effectively the Freeholder gets no financial return.
The case against abolishing ground rents is much the same as the case against introducing rent controls for private rented homes.
Just as opponents of rent controls rightly warn they would lead to fewer and poorer quality rental homes, so too will abolishing ground rents likely result in decaying housing stock and a short term view on compliance, maintenance and repair. Often where litigation is contemplated, or owners’ arrears need to be covered to get things done prior to cost recovery, having some ground rent sweetens the cashflow burden.
Whether you’re a buy-to-let landlord or freeholder, faced with a reduced return on your investment, you are less likely to reinvest into your assets.
Freeholders are also facing a more extreme policy than anything proposed by most rent control advocates. By capping ground rents on new homes at zero, the government is cutting off an entire source of income. An equivalent policy in the private rented sector would be to ban landlords from charging tenants rent to live in a property and instead only collecting a fee to cover the cost of the services they provide.
This is what the freeholders of new-build properties now face: no income from the ownership of an asset, with leaseholders only paying a service charge to cover repairs, maintenance and improvements to a building’s communal areas or structure. The underlying reason I am sure is to finally drive the commonhold dream.
There are plenty of reforms that the government could pursue that would be less headline-grabbing yet still have tangible benefits for leaseholders.
For example, moving to outlaw so-called doubling clauses – a genuinely nasty element of lease contracts which allows ground rents to double at fixed periods – while limiting ground rents to an annualised percentage of property value, would have the same effect as abolishing ground rents without potential abdication of responsibility by freeholders.
Associated expenditures faced by leaseholders, like service charges and Right to Manage costs, should also be considered as part of proposed reserve funds reform. That Right to Manage costs are not recoverable as a service charge expenditure if they were never drafted into leases, worse still as apathy creeps in the one remaining RTM member has to fund all the RTM costs, or to make reserve funds mandatory like in Scotland, these traumas simply exacerbated the plight of leaseholders now having to personally pay for the removal of dangerous cladding.
In short, abolishing ground rents is neither the broad solution nor the systemic reform leaseholders desperately require and most Property Managers in practice lack the belief that Commonhold is the way forward.
Politicians and the industry need to instead embrace a rights based attitude to the relationship between leaseholders and the underlying freeholder that serves to make management costs more transparent, recoverable, and easier to access.
Similarly, where leaseholders want to challenge the use of service charges the Government should encourage the transparency of the regulation of client money. Too many letting and managing agents are not subject to RICS checks which, for example, require a three-way bank reconciliation and client balances to be proven monthly. This is a source of leaseholders’ malaise relating to leasehold in general ground rents, and a concern that ought to be treated separately.
