© Mylo Kaye via Unsplash
In announcing government proposals in January 2021 for 'fundamental change to English property law', the then Housing, Communities and Local Government secretary Robert Jenrick said the creation of new ground rents would be prohibited.
He added that existing ground rents would be capped at 0.1% of capital value, while the enfranchisement process for both leasehold extensions and freehold acquisitions would be brought into line and simplified by enabling use of an online calculator. Marriage value would be abolished, and rates for calculations would be prescribed.
At a stroke, therefore, we would no longer need to argue about applicable rates, which graph of relativity is more relevant, or have to discover the rateable value of a house in 1965.
The first of these reforms is the Leasehold Reform (Ground Rent) Act 2022. When implemented – by regulations that have yet to be published – this will prohibit ground rents of anything more than a peppercorn being legally chargeable in new long leases for residential property. There are a few specific exceptions, such as statutory lease extensions for houses and flats, community housing leases, and home finance plan leases.
Controversially, an earlier amendment to the bill proposed that retirement home developers should be given an extra year to continue to sell leases with ground rents. Retirement home developers had argued for this on the basis that some sales with ground rents in many of their schemes had already completed. If the remaining units in these schemes were still unsold after the implementation date these would not be subject to ground rent, meaning there would be mixed tenures in the same scheme.
However, mixed tenure in blocks is not uncommon. Leaseholders extend at different times and thus the original co-terminus termination dates have disappeared – agreements are often made outside the Leasehold Reform, Housing and Urban Development Act 1993, so the lengths of extensions and ground rents differ anyway.
Despite the irrelevance of mixed tenures thus having been accepted, the provisions of the act will not apply to retirement homes until at least April 2023. However, regulations could be introduced sooner for the remaining types of residential development. Clearly, therefore, no allowance should be made for the capitalisation of future ground rent income in development appraisals.
Mortgage valuation reporting has been responsible, at least in part, for the apparent creation of value where logically it should not exist. The causes of this are the twin assumptions that leases with more than 85 years unexpired are as valuable as 999-year leases, and that annual ground rents of £250 or so – even with retail price index (RPI) escalators – do not have a significant impact on value.
These assumptions didn't seem to matter to mortgage lenders, as inflation would ensure the mortgage debt would always be less than the lease value. Thus, blind eyes were turned to leases being created for only 99 years and to ground rent escalators incorporated in leases.
Once the cash-cow investment value of ground rents had been spotted, the margins of reasonableness were tested with stepped increases. These were followed by RPI increases or ground rents and service charges being doubled every ten years, as well as hefty consent charges for everything from garden sheds to satellite dishes. The possibilities appeared to be endless.
Ironically, several developers had sold freeholds subject to ground leases on new houses at a small fraction of their appreciable value, and certainly for a lot less than the subsequent cost of early enfranchisement to leaseholders. Thanks to the Competition and Markets Authority (CMA), though, Taylor Wimpey, Persimmon and others have been forced to make costly concessions to leaseholders.
Although the CMA has interceded on what may be considered unfair contract conditions, future government proposals to intervene in existing, freely agreed 'fair' contracts between represented parties will perhaps prove less easy.
When the Leasehold Reform (Ground Rent) Bill was originally introduced in May last year, it was prefaced, in the context of the European Convention on Human Rights, by the then Chancellor of the Duchy of Lancaster Michael Gove, who assured Parliament that 'the provisions of the bill are compatible with the convention rights'.
This enabled the bill to pass through Parliament relatively easily. Changing the parameters for new contracts merely means that market forces will be disrupted slightly. In theory, if new leases carry no ground rent then the sale prices should increase correspondingly. In reality, that will not necessarily be the case.
However, the follow-up bill, to make future enfranchisement easier for existing leaseholders, will be exposed to rigorous analysis to ensure it satisfies human rights legislation. It is the rights of the freeholders that will be the bone of contention. Leaseholders who have held off enfranchising in the hope of an easy ride after further legislation may well be disappointed.
Although marriage value is likely to disappear, we should not expect that the process of calculating the value of the freeholder's or superior lessor's interest to be any less robust in capitalising the term rent and the reversionary value.
Similarly, to compensate for the loss of marriage value, the reversionary interest calculation could have a stepped change in the deferment rate. This could mean that the value at 80 years unexpired may remain something of a cliff edge. It is highly likely that capitalisation and deferment rates will be fixed by regulation, as this will enable the cost of enfranchisement to be set using a ready reckoner available online.
Hopes of an early follow-up bill may be dashed if the government feels committed to incorporate provisions for a transition from leasehold to commonhold in interdependent buildings. A considerable amount of work will be required to create a statutory framework for commonhold, if this form of tenure is to be imposed. Furthermore, assuming such a tenure is to be unassailable and provide freehold-like security, then it will prejudice the enforceability of covenants.
Such a move would be likely to be resisted by MPs such as Theresa Villiers, who has advocated the advantages of retaining so-called 'professional freeholders'. Ms Villiers suggests that independent freeholders offer some external discipline, and commonhold would mean that disputes over, for instance, choosing between higher maintenance standards or lower service charges, would remain to be settled, sometimes acrimoniously between neighbours.
However, given the existing rights for collective enfranchisement and the provisions of the 2022 Act, many are struggling to identify the advantages of commonhold over leasehold, especially if it becomes standard practice for the freehold to be transferred to the building's management company.
As the flaws of leasehold are being fixed by the 2022 Act and subsequent reforms, why ditch it for a new form of tenure, the nuances and consequences of which are untried and untested?
Robert Bryant-Pearson FRICS is a former member of the First-tier Tribunal (Residential Property), a previous CEO of Allied Surveyors and the founder of Appraisers UK
Contact Robert: Email
Related competencies include: Data management, Landlord and tenant, Valuation
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