The King's Speech: What next for ground rents?
As promised in the King's Speech, a consultation restricting ground rent for existing leases has been published.
The consultation, which closes on 21 December 2023, considers five ways in which legislation might intervene to cap leasehold ground rents for existing leaseholds. The Department for Levelling Up, Housing and Communities acknowledges that ground rents for new residential leaseholds are already capped at a peppercorn, and the government intends to enact legislation to extend protections to existing leaseholders, though not necessarily to the same extent.
There are five proposals put forward by the government:
- Capping ground rents at a peppercorn this proposal would bring in line the protections for existing leases and new leases. This would, of course, be of the biggest benefit to leaseholders but landlords will be wary as this move would potentially devalue their entire portfolios, which may have a knock-on effect on the already precarious housing market. The consultation asks for evidence to be provided from developers/landlords who would consider leaving the UK property market if this option were chosen.
- Setting maximum financial value for ground rent: the second proposal is to apply a maximum ground rent across the board. Whilst there is merit in doing so, the risk is this would create a regional bias and for leaseholders, this would not offer them protection against forfeiture.
- Capping ground rents at a percentage of the property value: this proposal seeks to target 'onerous' ground rents but there is a question mark as to the benefits to leaseholders and ability to monitor and enforce. The consultation suggests 0.1% of property value, so as not to limit leaseholders' ability to obtain mortgages.
- Limiting ground rent to the original value when the lease was agreed: whilst this proposal seeks to uphold the original agreement between the landlord and leaseholder, but the obvious drawback is that caps may differ significantly within the same building depending on when the lease was granted and regardless of what has been paid to date. The consultation asks for input into how to potentially mitigate this risk.
- Freezing ground rent at current levels: the final proposal favours simplicity, and would have less impact on freeholders than, say, option 1 but existing leaseholders would still be at a disadvantage vis-à-vis new leaseholders.
Throughout the consultation, the wording suggests that the government wishes to bring parity between new and existing leaseholds if it is able and, further, to seek to prevent leaseholders paying "something for nothing" in that a ground rent is not a payment for a service and ought not to exist where leaseholders pay a premium for leases. The rhetoric is part and parcel of the government's concern that leasehold property ownership is outdated and unduly biased towards landlords.
That said, the consultation gives the downsides of each proposal for freeholders and provides a forum for landlords to give their views, as well as freeholders. This is an opportunity that should be taken : the questions are within the same link as the details of the consultation and those who own or deal in leasehold property should consider giving their views, please see here.