The UK’s competition authority has stated that ground rent is not essential either legally or commercially, and suggests that the government might need to intervene to save consumers from escalating costs.
Housing Secretary Michael Gove is thinking about setting a cap on all current ground rents, potentially reducing them to a negligible “peppercorn” amount, effectively making them zero. A consultation was initiated in early December.
Many leaseholders are stuck in contracts that have ground rents increasing over time, which complicates their ability to sell or refinance their homes, and they risk losing property rights if they don’t keep up with payments.
The proposed government changes have been met with strong resistance from the Residential Freehold Association and the British Property Federation (BPF), who argue that changing the terms without compensating freeholders could lead to legal action and cost taxpayers money.
The Competition and Markets Authority (CMA) believes that legislative action might be necessary to protect consumers from high ground rents.
In a response to the government consultation, the CMA concluded that ground rent serves no legal or commercial purpose and found no evidence that consumers gain any benefits from it. They recognize that revamping the housing market to rid it of outdated practices is also a significant factor in the government’s decision-making process.
There has been an ongoing effort to reform the “feudal” leasehold system in England and Wales. Leaseholders don’t completely own their home and must pay ground rent to the freeholder. In 2019, the CMA began investigating unfair leasehold practices and has since assisted over 21,000 leaseholders to claim compensation from developers and freeholders. Ground rent for new leases was abolished in the summer of 2022 by the government.
The CMA has found that ground rent can lead to a host of issues and may often violate consumer protection laws.
One-fifth of homes in England are leaseholds. Investors began acquiring freehold titles in the 1990s, and large developers began selling their new homes with leaseholds, later selling the titles to investment firms.
The CMA worries about “modern leaseholds” that cropped up in the 2000s, which typically featured ground rents that doubled periodically or rose with inflation. The CMA believes investors may have driven the introduction of clauses in leases that allowed for these increases.
The CMA has announced that settlements have been reached with eight freehold investment companies and housebuilders to revise terms for leaseholders faced with doubling ground rents every decade or so, affecting over 500 households. These leaseholders will now see their ground rents revert to the initial charges and will not face increases over time.
The entities involved include three freeholders who had acquired leases from Taylor Wimpey and settlements between housebuilders like Redrow and Crest Nicholson with various freeholders to remove clauses for doubling ground rents.
Moreover, Abacus Land 1 agreed to amend terms on leases from Countryside.
Long Harbour, managed by a UK pension funds and investment fund, owns the Adriatic and Abacus companies. Its CEO is William Waldorf Astor, whose half-sister is businesswoman and wife of former prime minister David Cameron, Samantha Cameron. RMB 102, which used to be called Ashcorn Limited, has director James Tuttiett, who also manages a company overseeing over 40,000 residential leases.
The Leasehold Knowledge Partnership, a charity supporting leaseholders, asserts that ground rents were always just an additional profit for developers and speculative investors.
While acknowledging the CMA’s concerns, Ian Fletcher of the BPF maintains that the issue of rapidly escalating ground rents applies to only a small market sector and shouldn’t be used to negate the rights of most ground rent investors, who are often pension savers and should be considered consumers as well.
