Tens of thousands of people will be saved from onerous ground rents, thanks to the government. At least that is the narrative behind the Leasehold Reform (Ground Rent) Bill, which would require ground rents to be set at a ‘peppercorn rent’ level.
However, if left unchecked, the draft legislation which is currently passing through Parliament will unlock a range of unintended consequences for consumers up and down the country.
The issue that the bill seeks to address – the tendency for freeholders to double ground rents year on year – was already proactively addressed by freeholders more than two years ago and is an issue which now affects a very small proportion of the market (0.4 per cent to be exact).
The government’s blanket approach may be politically appealing, but the impact on consumers is enormous. Its own Impact Assessment, published alongside the draft legislation, sets this out in stark terms.
It states that removing ground rents will lead directly to a significant increase in property prices and create more barriers to entry for consumers trying to get on the property ladder.
Specifically, the report concludes that removing ground rent (which averaged £200 per year according to the government’s research) will lead to an increase in the price of flats by over 3 per cent – potentially adding £9,143 to the purchase price of a new build flat in England.
This is because the payment of a ground rent will essentially now happen at the point of purchase as opposed to being shared across multiple future owners throughout the lifespan of the property.
The report also clearly states that removing ground rent will require future buyers to have higher deposits or borrow more – and accepts that this “may not be viable” for all potential buyers who were only able to purchase a home at its previous cost.
With an increasingly ambitious housing target, the government needs to be honest about where these costs are going to be felt and who is going to be hit the hardest: first-time buyers.
Anti-leasehold campaigners may argue that this is a price worth paying for the widespread adoption of communal management. But the notion that there is any widespread public support for this model is a fiction.
An independent poll from Savanta of more than 1,000 leaseholders at the start of 2020 found that the vast majority of leaseholders (75 per cent) felt negatively about the new obligations they would have.
Consumers should always have a choice but forcing all flat owners, many of whom don’t even live in the properties they own, into a system of self-management will create more problems than it solves.
Whereas professional freeholders already have the necessary skills and expertise to effectively manage an apartment, including cladding-related issues and obtaining insurance coverage.
Again, the government needs to be more transparent about the fact that this legislation will leave leaseholders – many of whom are in the midst of a cladding crisis – with a myriad of new financial, safety and legal responsibilities for complex apartment buildings.
Thankfully, the solution to this challenge is simple. As recommended by the Housing, Communities and Local Government Select Committee when they examined this policy area, the government should introduce a limited exemption on the ground rent ban for those buildings where leaseholders would benefit from the option of having a freeholder (e.g. large and complex apartment buildings).
This wouldn’t prevent the uptake of commonhold but it would ensure that leasehold remains a viable option for prospective homeowners – reducing the cost of buying property and allowing them to transfer management obligations and liabilities if they want to.
This should be underpinned by stringent regulation and a binding Code of Practice for freeholders to ensure that professional standards are upheld and ground rent levels are kept at a reasonable level.
The government should therefore reconsider its bill and amend it accordingly before it passes into law, otherwise consumers will be the real losers.
Most professional freeholders appoint Management Companies with the necessary skills and expertise to manage an apartment. At present the leaseholders have no say in what they are doing. Leaseholders need Management Companies to work for them. Ground rent has nothing to do with property management and upkeep. Homes should be marketed at reasonable profit margins for developers. If consumers can not afford them, then long term fair rental contracts should be available to offer secure homes. There will also be a stronger demand for higher wages and lower taxes. If the Govt. wants citizens to be homeowners they could offer incentives such as interest payments being tax deductable, or other help to buy initiatives.