Government announces long awaited Ground Rent proposals

The Ground Rent proposals announced by the Government are likely to appease owners of leasehold properties given the amount of growing unease concerning ground rents. Doubling ground rents, where unassuming leaseholders have been taken by surprise with radically inflating and onerous ground rents, have been well documented in the media. Ground rents have become symbolic for far more than payment of monies due on a lease, and have been connected with unfair practice, duplicity and misrepresentation in the new homes market.

Proposed Reforms

The long awaited proposals on leasehold reforms were announced by the Housing Secretary Robert Jenrick on 7 January 2021, and include:

  • The right for current leasehold home owners to extend their existing lease by 990 years and reduce their ground rent to zero
  • A proposed online calculator to provide a standardised valuation for a leaseholder to extend their lease or to purchase the freehold
  • A Commonhold Council to be set up to promote commonhold as a valid and desirable alternative to leasehold ownership.

On the face of it the proposals seem positive. The ability for leaseholders to extend their leases by up to 990 years, with a cap on future ground rent; and to abolish future ground rents for new leases are bound to be welcomed by home owners. However, the devil is in the detail: these are only proposals at this stage. Until we are able to scrutinise the legislation there are still a lot of unanswered questions.

There is also the risk that these changes will create a two tier market between schemes that either do or do not have a ground rent, reflected in the value freeholds of such properties can attract.  

Public perception of Developers - opportunities for change

The sense that developers have been exploiting purchasers was prevalent in the various government consultations. It has certainly been difficult for developers to shake off those negative connotations, despite many major developers staying one step-ahead of the proposals.

Many developers have already removed any ground rent from their standard transfer documents and are conscious that point of purchase negotiations need to be as transparent and clear as possible. No doubt developers will be hopeful that the legislation will begin to bring an end to feelings of unfair practice in the sale of new-build properties and improve the public's perception of developers.

Commonhold - a new way of holding real estate

A commonhold interest is the government's suggested alternative to leasehold home ownership. Under a commonhold, a homeowner would own the freehold of the individual building, with the rest of the building or estate owned as a commonhold (such as the common areas and the actual structure of a block of flats, for instance). The commonhold would be owned by a commonhold association made up of the freehold owners of the individual units.

Although this democratic concept of commonhold looks appealing in theory, in practice this remains a very unusual way of holding property. The Government's aspirational claim that commonhold purchases will have a 'widespread take-up' is questionable. Until the majority of lenders will accept schemes being set up on a commonhold basis, it's unlikely that developers will take it forward.

Commonhold interests are destined to be the electric car of the property world: everyone knows it's the way forward but until it has become a little more mainstream, take up will remain low. It is likely to be some time before leasehold property interests no longer exist.

Time for change

A report conducted by NEAE Propertymark found that 94% of respondents regretted buying a leasehold property. This testifies to the growing feeling amongst the public that, whether valid or not, leasehold property interests are to be avoided. The Government proposals represent a big step forward; it is imperative that homeowners feel secure and informed when purchasing a property, whether that be freehold, leasehold or commonhold.

For more information on the article above please contact Lola Skuse from the Real Estate team.

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