Government Consultation on capping existing ground rents
Consultation
The King’s Speech on 7 November 2023 marked the introduction of the much-anticipated proposals to reform leasehold home ownership. One of the key proposals noted related to the potential capping of existing ground rent for residential long leasehold properties in England and Wales. The purpose is to make the residential leasehold system more transparent, protecting the millions of people who own a leasehold property. The Government regard such existing ground rent as a historical anachronism with no legal requirement for the ground rent to be reasonable or linked to any service provided.
On 9 November 2023, the Government opened a consultation portal (https://www.gov.uk/government/consultations/modern-leasehold-restricting-ground-rent-for-existing-leases), in which stakeholders are able to submit their opinions on existing ground rents and the various options for intervention that the Government has put forward in relation to the capping of existing ground rents.
This consultation period is only open for six weeks (closing on 21 December 2023)- so stakeholders are encouraged to make their submissions at the earliest opportunity in order to ensure their views are considered.
The Government has noted that subject to this consultation, they will look to introduce a cap on existing ground rents through the Leasehold and Freehold Reform Bill (Reforming the Housing Market: A word from the King (cms-lawnow.com)).
The consultation seeks views on:
- the full range of problems that existing ground rents can cause for leaseholders, and the scale of these problems;
- which of the options to cap ground rents (see the proposals below) respondents believe is the right one in order to deliver the Government’s aim of giving leaseholders a fairer deal;
- whether any future ground rent cap should be allowed to be uprated so that the value of the ground rent could increase across time;
- whether there should be a period of delay before implementing any cap;
- the types of leases which need to be exempted from any cap on ground rents for example where a lease has been granted for fewer than 21 years in length;
- any practical barriers to consider before introducing a cap;
- suggestions to mitigate any potentially negative impacts of a cap; and
- the enforcement process following the introduction of a cap.
The Proposals
Within the consultation portal, the Government has invited opinion and submissions by stakeholders in respect of the following five options that are currently under consideration:
- Capping ground rents at a peppercorn – the Government particularly encourages stakeholders to share any evidence of the likelihood of freeholders leaving the market if a peppercorn cap is introduced, and if it were to happen, the potential impacts on freeholders, leaseholders, investors and the wider market;
- Setting a maximum financial value for ground rent;
- Capping ground rents at a percentage of the property value;
- Limiting the ground rent to the original value when the lease was agreed;
- Freezing the ground rent at current levels.
These options will build on the Government’s existing manifesto commitments to deliver a better deal for leaseholders, and more specifically on the Ground Rent Act 2022 (Ground rent legislation receives Royal Assent (cms-lawnow.com) now in force which has already limited ground rent on new long leases of houses and flats (with certain exceptions) to one peppercorn per year.
The effect of the Proposals
Regardless of which option the Government deems the most appropriate following its consultation, the result may have a significant adverse financial impact on the value of portfolios held by professional and institutional landlords and investors who rely on ground rent as an income stream.
Landlords and others potentially affected by these proposals should engage with valuers, in order to understand how each option noted above might financially affect their particular situation including the impact on the value of their portfolios and future receipts such as those relating to potential enfranchisement claims. If you think that the proposals might well affect you, you should consider responding to the Government’s consultation sooner rather than later in view of the tight timeframe for making submissions. Since there is no option in the consultation to preserve the status quo, whatever the outcome the Government is likely to follow through on its commitment to introduce reforms to existing ground rents through the Leasehold and Freehold Reform Bill.
How to respond
Details on how to respond are included here, with the deadline of 21 December 2023.
