Modern leasehold: restricting ground rent for existing leases

The Department for Levelling Up, Housing & Communities (DLUHC) is undertaking a consultation seeking views on limiting the level of ground rent that leaseholders can be required to pay in England and Wales.

The consultation asks for views on the the following:

• the full range of problems that existing ground rents can cause for leaseholders, and the scale of these problems
• which option to cap ground rents respondents believe is the right one to deliver our aim of giving leaseholders a fairer deal
• whether there should be a period of delay before implementing any cap, and
• the types of leases which need to be exempted from any cap to ground rents.

The consultation closes on 17 January 2024.

The Leasehold Reform (Ground Rent) Act 2022 put an end to ground rents for most new long residential properties from 30 June 2022. Certain types of leases are, however, exempt from the Act, which means a leaseholder can be required to pay a rent which is more than a peppercorn rent. Government permitted exemptions to the peppercorn cap for a number of categories, including shared ownership leases, where ground rent is payable on the freeholder’s owned share.

The notes on the consultation make it clear why this consultation is so important to shared owners, who are currently exempted from caps on ground rent.

1.102. Shared Ownership in England is an affordable homeownership scheme that enables people to purchase an equity stake in a home worth between 10% and 75% of the home’s full market value. The equity stake in the home not purchased by the shared ownership leaseholder is retained by the landlord. The shared ownership leaseholder must then pay rent to their landlord in respect of their retained equity stake in the home. This rent is known as a ‘specified’ rent. Specified rents are different from ground rents. Over time, the shared ownership leaseholder can increase the size of their equity stake in their home through ‘staircasing’ (usually all the way to 100%).

1.103. Currently, landlords who granted shared ownership leases before the Leasehold Reform (Ground Rent) Act 2022 came into force can charge a ground rent on the shared ownership leaseholder’s equity stake in their home. We believe that the cap on ground rents should be applied to these existing leases, limiting any ground rent charged on the shared ownership leaseholder’s equity stake to the chosen cap. Our proposal for a cap on ground rents would have no impact on the ability of landlords to charge a specified rent. This mirrors the position taken previously by the Leasehold Reform (Ground Rent) Act 2022. We invite consultees to comment on this proposal (Q20).

Shared Ownership Resources’ response is below.

Question 1. Think about how leaseholders experience ground rent. What do you see as the key problems that ground rents are causing for leaseholders? (Select all which apply)

• Leaseholders or prospective leaseholders do not understand the terms of the ground rent when buying property
• Leaseholders have to pay a ground rent for no clear service given in return
• Leaseholders find that ground rent payments are unaffordable
• Leaseholders find that ground rent payments get more expensive over time
• Leaseholders do not know or understand when their ground rent will increase
• Leaseholders do not know or understand how much their ground rent will increase
• Leaseholders and prospective leaseholders cannot buy or sell property because mortgage providers do not like the ground rent terms
• Other

Affected shared owners are particularly badly affected by ground rent problems as they do not have access to the statutory route to lease extension, which reduces ground rent to a peppercorn. They are also, perhaps, less likely to be aware of and/or understand the term of ground rent when buying property with complex ownership arrangements, if ground rent is required via superior leases and/or triggered by 100% staircasing..

Question 2. Do you have any evidence of the scale of any problems that ground rents are causing leaseholders?

No. Given that shared ownership is provided via an Affordable Homes Programme, it would be helpful for national monitoring data to capture exactly how many SO homes have a ground rent term, the amount, and whether fixed or escalating.

Question 3. If government were to legislate to rectify problems with ground rents in existing leases, which of the proposed options could achieve this?

Our response: Capping ground rents at a peppercorn (zero financial value).

Question 4. Considering all options to cap ground rent, please rank the following in order of preference, and/or provide an alternative option. You may rank up to six options, with 1 being your most preferred option and 6 your least.

Our response: Option 1 – Capping ground rents at a peppercorn (zero financial value).

Ground rent should be set at a peppercorn for leaseholders, including shared owners. It is not reasonable or fair for leaseholders, including shared owners, to pay a charge for which they receive no service in return.

Question 5a. Would capping ground rents at a peppercorn have a positive, neutral or negative impact on the following groups:

Q5b. Please consider the impacts of a peppercorn cap on leaseholders.

What are the advantages of a peppercorn cap for leaseholders?

A peppercorn cap would put existing leasehold properties on a level playing field with new properties following the 2022 Ground Rents Act. This would eliminate ground rent affordability issues, make properties easier to sell, and make lease extension cheaper and easier.

It is not fair or equitable to exclude shared owners from the benefits of peppercorn ground rent, or a cap.

What are the disadvantages of a peppercorn cap for leaseholders?

The exclusion of shared owners from the benefits available to other leaseholders, would exacerbate and further entrench risks and hazards associated with the shared ownership scheme.

Question 5c. Please consider the impacts of a peppercorn cap on freeholders/intermediate landlords.

Not answered.

Question 5d. Please consider the impacts of a peppercorn cap on investors – including local authorities, pension funds and others.

Not answered.

Question 5e. Please consider the impacts of a peppercorn cap on mortgage lenders.

Not answered.

Question 5f. Please consider the impacts of a peppercorn cap on the wider property market (developers, conveyancers, estate agents etc.).

Not answered.

Question 5g. Imagine that government introduces a peppercorn cap. Consider whether there should be a period of delay between the legislation passing and a peppercorn cap coming into force. Which of the following statements do you agree with the most?

• I would prefer for there to be immediate implementation of a peppercorn cap (once the necessary legislation had passed).
• I would prefer for there to be a period of delay before a peppercorn cap was introduced.
• I do not support a peppercorn cap on ground rents, regardless of any period of delay.

Question 5h. If you selected “I would prefer for there to be a period of delay before a peppercorn cap was introduced”, imagine that a peppercorn cap was introduced. How long should the period be between the law being passed and the cap being implemented?

N/A

Question 5i. Imagine that a peppercorn cap was introduced with a period of delay before implementation. Which of the following statements do you agree with the most?

• The value of ground rents should be frozen during the period of delay
• Ground rents should continue as they are, including the potential to increase, until the new cap is implemented.

Question 5j. Imagine that the peppercorn cap was introduced. Are there any circumstances or types of property which should be subject to different transitional arrangements?

No.

Question 6a. Would capping ground rent at an absolute maximum value have a positive, neutral or negative impact on the following groups:

Question 6b. Considering those impacts, what are the advantages of a cap at an absolute maximum value?

Not answered.

Question 6c. Considering those impacts, what are the disadvantages of a cap at an absolute maximum value?

Not answered.

Question 6d. If government were to introduce this cap, what should the absolute maximum value be (£)?

Not answered.

Question 6e. Imagine that the absolute maximum value cap was introduced. How long should the period be between the law being passed and the cap being implemented?

• I would prefer to see an immediate implementation of this option (once the necessary legislation had passed)
• 6 months
• 1 year
• 3 years
• 5 years
• More than 5 years

Question 6f. Imagine that the absolute maximum value cap was introduced. Are there any circumstances or types of property which should be subject to different transitional arrangements?

No.

Question 7a. Would capping ground rents at a percentage of the property’s value have a positive, neutral or negative impact on the following groups:

Question 7b. Considering those impacts, what are the advantages of capping ground rents at a percentage of the property’s value?

Not answered.

Question 8a. Would capping ground rents at the original amount it was when the lease was granted have a positive, neutral or negative impact on the following groups:

Question 7c. Considering those impacts, what are the disadvantages of capping ground rents at a percentage of the property’s value?

Not answered.

Question 7d. Imagine that the government introduced a cap at a percentage of the property’s value. What percentage of the property value should this be and why?

Not answered.

Question 7e. Imagine that the government introduced a cap at a percentage of the property’s value. Who should be responsible for making sure that valuations of the property are undertaken?

Not answered.

Question 7f. Imagine that the government introduced a cap at a percentage of the property’s value. How long should the period be between the law being passed and the cap being implemented?

• I would prefer to see an immediate implementation of this option (once the necessary legislation had passed)
• 6 months
• 1 year
• 3 years
• 5 years
• More than 5 years

Question 7g. Imagine that the government introduced a cap at a percentage of the property’s value. Are there any circumstances or types of property which should be subject to different transitional arrangements?

Not answered.

Q7g. Imagine that the government introduced a cap at a percentage of the property’s value. Are there any circumstances or types of property which should be subject to different transitional arrangements?

No.

Question 8a. Would capping ground rents at the original amount it was when the lease was granted have a positive, neutral or negative impact on the following groups:

Question 8b. Considering those impacts, what are the advantages of capping ground rents at their original value?

Not answered.

Question 8c. Considering those impacts, what are the disadvantages of capping ground rents at their original value?

Not answered.

Question 8d. Will establishing what the original ground rent value in leases was (i.e., the ground rent charged in the first year of the lease), create a significant problem for implementing this option?

Not answered.

Question 8e. In instances where the original ground rent amount cannot be established, how should the value of the cap be determined?

Not answered.

Question 8f. Imagine that the government caps ground rents at their original value. How long should the period be between the law being passed and the cap being implemented?

•  I would prefer to see an immediate implementation of this option (once the necessary legislation had passed)
• 6 months
• 1 year
• 3 years
• 5 years
• More than 5 years

Question 8g. Imagine that the government caps ground rents at their original value. Are there any circumstances or types of property which should be subject to different transitional arrangements?

No.

Question 9a. Would freezing ground rents at their current value have a positive, neutral or negative impact on the following groups:

Question 9b. Considering those impacts, what are the advantages of freezing ground rent at their current value?

Not answered.

Question 9c. Considering those impacts, what are the disadvantages freezing ground rent at their current value?

Not answered.

Question 9d. Imagine that government introduced the cap freezing ground rents at their current level. How long should the period be between the law being passed and the freeze being implemented?

• I would prefer to see an immediate implementation of this option (once the necessary legislation had passed)
• 6 months
• 1 year
• 3 years
• 5 years
• More than 5 years

Question 9e. Imagine that government introduced a freeze on ground rents at their current level. Are there any circumstances or types of property which should be subject to different transitional arrangements?

No.

Question 10. Imagine that a ground rent cap comes into force and it was an option which could be uprated over time. Which of the following mechanisms for increasing ground rent do you most agree with?

• Ground rents should not be able to increase again after a cap is introduced. (If there was a maximum value cap in place, ground rent should be able to rise to that fixed maximum value but never beyond it)
• Ground rents should increase by a pre-determined index link (e.g., the retail price index (RPI))
• Ground rents should increase by a fixed increments (e.g., a doubling term at a given interval)
• Ground rents should increase by an open market review (e.g., in line with any increase in capital value of the property at a given interval)
• Ground rents should increase by a different mechanism (please specify)
• Not sure

Question 11. Are there any specific freeholder management functions which cannot be charged through the service charge?

No.

Question 12. We want to improve the transparency and accountability of costs by making sure that freeholder management functions can be funded through the service charge. Can you foresee any unintended consequences of bringing all freeholder management functions into the service charge regime?

No.

Question 13. Do you believe there are any specific considerations that we need to give to blocks that have exercised the Right to Manage?

Not sure.

Question 14. In instances where leaseholders have exercised the Right to Manage, does the freeholder or intermediate landlord continue to provide any specific freeholder management functions which contribute to the ongoing maintenance or smooth running of the building?

No.

Question 15. Imagine that a ground rent cap is introduced. Do you think that compensation should be paid to freeholders or intermediate landlords for any loss of ground rent revenue?

No.

Question 16. Imagine that a ground rent cap is introduced. Do you think that leaseholders should be reimbursed for past payments of ground rent where they were above the newly introduced cap?

No.

Question 17. Imagine that a ground rent cap is introduced. Do you think that leaseholders should pay any related administrative or legal costs?

No.

Question 18. For each option to cap ground rents, please indicate whether you agree or disagree that the enforcement provisions could mirror those set out in the Leasehold Reform (Ground Rent) Act 2022, including the financial penalties if freeholders and intermediate landlords impose a ground rent on leaseholders which falls outside of the reformed ground rents regime.

Question 19. Please select any type of lease which you agree should be given an exemption to a cap on existing ground rent

• Where a lease has been granted for fewer than 21 years in length
• A long residential lease where the current freeholder or intermediate landlord can prove they have negotiated an agreement resulting in the current leaseholder not having to pay a premium
• Where leases are for community-led housing: where it is a community housing lease (where the landlord is a community land trust) or it is in a building controlled or managed by a co-operative society
• Leases that are for home reversion plans or ‘rent to buy’ arrangements or sharia compliant finance that rely upon rent to operate as a route to purchase a home
• Business leases as defined by the Leasehold Reform (Ground Rent) Act 2022.
• Other
• None of the above
• Not sure

Question 20. Do you think that Shared Ownership leases should be subject to the ground rent cap, for the share owned by the leaseholder?

Yes.

Shared owners should have the same rights and protections as any other leaseholder. Particularly given the widespread and ongoing failure to spell out key differences between ‘standard’ leasehold tenure and the assured tenancy nature of shared ownership in lease contracts, government information and housing provider marketing materials.

Question 21. Are you aware of any costs – other than lost ground rent revenue – that introducing a cap on ground rents would generate?

No.

Question 22. Are you aware of any practical barriers to introducing a cap on existing ground rents, which you have not addressed in your previous answers?

No.

Question 23. We want to hear about additional measures that could minimise the impacts of a cap on different stakeholder groups (leaseholders, freeholders and intermediate landlords, investors, mortgage lenders, the wider property market). What other measures, if any, should be considered to minimise any negative impact that a cap may have? Please tick which groups will benefit from your suggested measures.

Not answered.

Question 24. Do you believe any of the proposals put forward could negatively or positively impact on individuals who have a protected characteristic, as defined under the Equality Act 2010?

Not answered.