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THE END OF LEASEHOLD HOUSES AND INVESTMENT IN THE RESIDENTIAL GROUND RENT SECTOR?

By Kerry Coleman 

The consultation paper “tackling unfair practices in the leasehold market” was published in July 2017 and seeks views on the following proposals;

  1. Prohibiting the sale of new build leasehold houses
  2. Restricting ground rents on new leases to a peppercorn
  3. Inviting comments on how to tackle existing onerous ground rents
  4. Closing a loophole and exempting leaseholders potentially subject to possession orders under the Assured Tenancy regime by non-payment of ground rent under a long lease
  5. Providing freeholders on private estates with equivalent rights to leaseholders to challenge unreasonable service charges for the upkeep of communal areas and facilities via the First Tier Tribunal (Property Chamber).

The consultation period will last for eight weeks from 25 July 2017 until 19 September 2017.

Escalating grounds rents and onerous ground rent clauses have received significant press over recent months.

The Guardian recently reported that the purchaser of a one-bedroom flat in Edmonton, north London, currently pays ground rent of £200 a year, however this will double every 10 years to reach £6,400 by year 50.

In May, Nationwide announced they would no longer lend against any new-build leasehold flat or house where the ground rent was more than 0.1 per cent of the value of the property.

The building society also indicated it will refuse loans on new build flats with lease lengths of less than 125 years or new houses with less than 250 years.

The proposals to provide freeholders on private estates with the equivalent rights to leaseholders to challenge unreasonable services charges is uncontroversial, as are the proposals to close the loophole and update Ground 8 of the Housing Act 1988 so long leases over 21 years with an annual ground rent of over £1,000 in London and £250 outside of London cannot be an Assured Tenancy.

Both proposals are welcomed. However, the paper fails to consider what can be done to assist existing leaseholders.

Furthermore, there are concerns that the proposal to restrict ground rents on all new leases may affect investment in the residential sector.

Ground rents form the basis of support for many pension funds because they provide a long term stable income. Any reduction in the level of ground rents generally may impact on those funds. In addition, if ground rent is restricted to a peppercorn 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 also become less viable which could have more far reaching consequences.

Anyone wishing to comment has until midnight on 19 September 2017 to have a say by completing this online survey – http://www.surveymonkey.co.uk/r/leaseholdhouses