Is it game over for ground rent?

Government proposals to change the rules on ground rent could hit developers hard.

Recent Government proposals intend to put a stop to new build houses being sold as leaseholds.  The Department for Communities and Local Government has also suggested that ground rents on flats could be cut to zero.

What has prompted these legal changes, and what effect might these proposals have on residential house builders and developers?

1. Background to changes:

• Ground rent is a charge levied on leasehold properties, paid to the owner of the land on which the building sits.

• Traditionally flats have been sold on a leasehold basis; however houses can also be sold as leaseholds.  The effect is that the freeholder of the land can charge a ground rent, and the property reverts back to the freeholder at the end of the lease term.

• Ground rent charges should be set out in the lease and are often relatively low. There may, however, be a provision in the lease for an increase at various stages throughout the term.   For example, if a house or flat was sold on a lease term of 150 years, the ground rent lease clause may allow for an increase every 10 years.  

• Some leases provide for ground rent to double every 10 years.  Whilst this may not be an issue in the early part of the term, it could potentially render the leasehold property unsaleable at a later date.  By way of example, if the initial ground rent was £10 a year, and the ground rent clause allows the ground rent to double every 10 years, by the end of the 150 year term the leaseholder would be paying over £150,000 each year in ground rent alone. 

• Further to the financial burden, the increasing ground rent may also result in the lease being deemed an assured tenancy.  Where rent exceeds £250 a year (or over £1,000 in Greater London), a lease will be classed as an assured tenancy.  Assured tenancies are governed by the Housing Act 1988 which provides additional rights to landlords to evict tenants and to recover possession of the leasehold property before the end of the term.

2. Future for housing developers:

• In addition to selling the new build flats or houses to individual purchasers, developers often sell the freehold land to ground rent companies who acquire sites for the purpose of receiving the income generated from the ground rent.

• If ground rent is scrapped then there will no longer be any value in selling the freehold to ground rent companies.  If this source of revenue for developers is removed, new build schemes may become less viable.

• As part of most new scheme developments, developers are obliged to provide some affordable housing.  Developers therefore have to juggle the profitability and viability of new build schemes. By removing ground rent revenue for developers, we query what affect this will have on the viability of new build schemes and whether there will be a knock on effect to the provision of affordable housing, which cannot be Government's intention.

• Plainly there needs to be some reform on the levels of ground rents being charged to protect leasehold owners, as well as resolving the unintended consequence of creating assured tenancies, however this needs to be balanced with development scheme viability and ensuring that housing needs are met.  We wait with interest to see how this balancing exercise is resolved.