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The latest news on the reform of ground rent

grass to symbolise ground rent

This post explains what leaseholders need to know about reforms to ground rent. These include the Leasehold and Freehold Reform Bill and the pending consultation into the restriction of ground rent, and the abolition of ground rent for leases granted after 20 June 2022, introduced by Leasehold Reform (Ground Rent) Act 2022.

The post also explains what ground rent is, why it’s so unpopular with leaseholders, and summarises the long-running investigation of the Competition and Markets Authority into the “problematic” doubling ground rent clauses, where ground rent double after a set periods of time.

I update this post regularly.

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Last updated: 16 April 2024

What is ground rent?

It is a sum which the owner of a leasehold property pays each year to the owner of the freehold. Unlike the service charge, the freeholder does not need to provide a service in return.

Historically, ground rents were of a low or nominal value paid under a long lease that was granted for an up front sum (a premium) which was the market value of the lease. However, this has changed in recent decades, and the average ground rent reported in the 2021/22 English Housing Survey was £298 pa.

The Leasehold Reform (Ground Rent) Act 2022 abolished ground rent was abolished for leases granted on or after 30 June 2022.

Why is ground rent so unpopular with leaseholders?

If ground rate increases over time by inflation or by a set amount (eg doubling every x years), this can make the property less attractive to buyers and difficult to mortgage.

In a survey of 219 member agents in March 2023 by Propertymark, 78% said that a leasehold property with an escalating ground rent will struggle to sell, even if priced correctly.

What are doubling ground rent clauses?

Before 30 June 2022, leases often contained clauses obliging leaseholders to pay a rent which doubled after a set periods of time. For instance, if it started at £250, and doubled every 10 years, this could become £2,000 after 30 years. These are referred to as doubling ground rent clauses.

These clauses are very unpopular with lenders (eg Nationwide). Consequently, onerous clauses can make a property difficult to sell to anyone other than a cash buyer, unless the freeholder agrees to amend the clause.

Although the Leasehold Reform (Ground Rent) Act 2022 introduced a ban on these clauses, the ban only benefits leases granted on or after 30 June 2022.

Competition and Markets Authority investigation into doubling ground rent clauses

The Competition and Markets Authority (CMA) launched an investigation in 2019 into possible breaches of consumer protection law by several housing developers relating to doubling ground rent clauses. The good news is that several have since entered into undertakings to remove these clauses from the leases, and not to increase the amount. Here’s an example of one of these undertakings, by Adriatic.

On 13 March 2024, the CMA announced that a further 8 freeholders have agreed to release leaseholders from “problematic clauses” in their leases, bringing the total to more than 30 companies who has signed undertakings since 2019. The CMA estimates “over 21,000 households in total freed from problematic leasehold issues to date”.

The list includes include investment firms who bought freeholds originally owned by housing developers Countryside, Crest Nicholson, Miller Homes, Redrow, Taylor Wimpey, and Vistry.

However, these are for the worst clauses where ground rents double every 10-15 years, and not those onerous clauses where they double every 20-25 years.

How the Leasehold and Freehold Reform Bill may change ground rent for existing leases

The government introduced the Leasehold and Freehold Reform Bill to the House of Commons on 27 November 2023. It gives new rights to leaseholders to have longer extensions on leases to flats and houses, and makes it cheaper and easier for them to do it. It also introduces new rules for transparency on service charges and estate charges.

DLUHC launched a consultation on 9 November 2023, which closed on 17 January 2024, to seek views on how the government could intervene to cap the ground rent leaseholders have to pay. The consultation document goes through the pros and cons of each. Here are the 5 alternative methods for limiting it which are outlined in the consultation:

  • capping it at a peppercorn.
  • setting maximum financial value.
  • capping it at a percentage of the property value.
  • limiting it to the original value when the lease was agreed.
  • freezing it at current levels.

In the Second Reading debate on the Bill, Michael Gove said that although he cannot pre-empt the outcome of the consultation, his “favoured approach” was that it should be a peppercorn, referring to it as a “squeezing of the freeholder’s income stream”.

He reiterated that they would aim to introduce reforms to ground rent in the Leasehold and Freehold Reform Bill, subject to the outcome of the consultation.

The value of ground rent will also be capped at 0.1% of freehold value in the valuation calculation for lease extensions and collective enfranchisement (when leaseholders in a block buy out the freehold together). Whilst not a peppercorn, this is welcome news for leaseholders.

The results of the consultation are eagerly awaited by leaseholders and freeholders alike.

>> Related Post: Practical guide to the Leasehold and Freehold Reform Bill

>> Useful Resource: Impact assessment for restricting ground rent for existing leases

Will ground rent be abolished?

Ground rent has already been abolished for new leases granted after 30 June 2022 under the Leasehold Reform (Ground Rent) Act 2022, but it’s still in place for existing leases. There are no plans to abolish ground rent for existing leases as such, but the government is consulting on different methods of capping it, for inclusion in the Leasehold and Freehold Reform Bill.

Also, as mentioned, there are provisions in the Bill that would cap the value at 0.1% of the freehold value in the valuation for buying the freehold or extending the lease.

Final thoughts

Ground rents are a key issue to watch out for when buying leasehold property or if buying out the freehold. However, hopefully the Leasehold and Freehold Bill will introduce a cap for existing leases.

>> Related Post: Do houses or flats make better buy to lets?

The latest on ground rent reform with a photo of grass
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