Ground Rent: Is This The Dawn Of The End?

A London estate agent is advertising leasehold flats in a new build block with no ground rent to pay - a first for the capital according to the sales literature.

There are a number of developers who sell their homes on 999-year leases with no ground rent and while ditching it is certainly going to be popular with residents and is bound to be a selling point for the agents involved - what is the impact on the market? These developers tend to do one of two things on sale. They either hand the freehold over for free to the residents - who may not have the skills or financial muscle to enforce covenants or they retain them. They don't let the residents take control by setting up a resident management company but hold the freehold forever and invest in a whole department to appoint, oversee and scrutinise the managing agents, as they see today's buyer as someone they can re-sell to.

However, most developers do sell-on their ground rents - and its a buoyant market. The market has adjusted investment yields since the government announced that it intends to legislate for ground rents to be reduced to zero. It is the doubling of ground rents by some unscrupulous freeholders that has been so horrendous for leaseholders. This a scandal that, rightly, the government has moved to prevent. Reform is promised to amend the Housing Act 1988 to tackle unfair ground rent clauses but when this will be implemented is anyone's guess.
However, there is an argument for retaining ground rent at a reasonable level. Let's not forget that freeholders charging ground rent have a vested interest in their investment. So it is worth their while to ensure blocks are well maintained and compliant with the rules and regs that impact leasehold. If they get no benefit from owning a property, they may be tempted to cut corners.

A better approach may be to outlaw doubling clauses and limit ground rent to a percentage of the property value. That way ground rent is transparent. Homeowners know what they?re buying and they can purchase their freehold at an affordable price if they want to. As we said in this blog last week, if freeholders have no income to gain from their leasehold properties that could lead to an abdication of care and the potential to take no interest in the condition of the buildings, health and safety or compliance issues. None of this would benefit leaseholders.