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Maurice Cousins's avatar

Well said Rachael! You have been brilliant - both as Housing Minister and a member of this Committee. Your constituents are lucky to have you.

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James Francis's avatar

The ground rent consultation poses a clear choice for those in power. Which is preferable - pension funds lose money (although they have <1% invested in ground rents, so within investing risk tolerances), or condemn hundreds of thousands of people (often young people) to financial ruin by having their properties valued at £0 and unsellable?

Let me explain why it is this binary. The freeholder lobby will say that the small number of doubling ground rents (some say 5,000 of these, some say 20,000) are the only onerous ground rents, but it’s not the case. Mortgage lenders – the real decision makers on what is onerous or not – are dragging more and more ground rent terms into that bucket, and hence valuing more and more flats at £0. Lenders increasingly state that any ground rent is deemed onerous if it is more than 0.1% of the property value, or soon will be. For reference, Nationwide became the first bank to reference 0.1% in their lending criteria, and The Law Commission report on ground rent reaffirmed it, and since then more banks have jumped on this. Conveyancers are also becoming more cautious (when previously asleep at the wheel) and are starting to demand a Deed of Variation if the ground rent will go above 0.1% in the near future, with freeholders then charging five figure sums for a change.

If flat prices were growing exponentially, then this becomes less of a concern, but since Grenfell and the cladding scandal, and now widespread media coverage of “toxic leasehold”, flat prices are dropping and the gap between freehold house and leasehold flat prices is increasing, where they used to grow in unison (the FT reported in May last year that London house prices are up 17% since 2017, but flats are down 1%). Estate agents will back this up – I’ve heard many tell me that if you bought a new build flat in the past 10 years, you’ll be lucky to sell it for the same price you bought it. Flat prices trending downwards, and ground rent trending forever upwards, creates a car crash for flat marketability and valuations.

Let’s do the maths. After a typical 10 year RPI linked review, of which there are hundreds of thousands of these leases, the average £298 ground rent (government calculated national average) will start getting over 0.1% of the typical leasehold property value at the first or second rent review, if it is not already (average flat in the UK is around £250,000). To compound this, banks do not like to lend if a leasehold is an Assured Tenancy liability, or AST (many will become an AST after the first or second RPI review, especially outside London when AST kicks in at only £250). And some RPI reviews calculate this on an annual compounded basis. Those actually work out as worse than a doubler anyway (which often stopped doubling after 60ys) – someone with compounded RPI will end up paying more in ground rent over the length of a typical 125-year lease, than they paid for the property in the first place – clearly onerous. This is why freeholders saying “RPI is fine” is dangerous and untrue.

This has popped up as a national issue now because the first tranche of these toxic leases have come up for their first ground rent review in the past two or three years, and people are now finding it had to remortgage or sell. It’s the cladding scandal 2.0.

The other misleading narrative from the freeholder lobby is their claim that the initial leasehold sale price “reflected the ground rent terms” and was often below true market value because of it, which any buyer knows is not the case. Leasehold flats, especially new builds, were sold at prices that were broadly the same as a Share of Freehold flat and at a full market value.

Policymakers knows they can’t stand by and watch hundreds of thousands of flats slowly become worthless over the next 20 years, due solely to escalating ground rent clauses, when we already have a chronic shortage of housing stock for first time buyers. Hence why a cap is being suggested. That’s the basic economic argument, let alone the moral/social argument. Freeholders are incapable of self-regulation (cladding showed that), so the government has to step in.

Freeholders and developers need to accept that they got a bit too greedy when packaging up ground rent as a new asset class about 15 years ago (ground rents were a nominal “peppercorn” amount for generations don’t forget), exploiting the hot property market for flats that that (before all these scandals) had high demand, and allowed them to set whatever terms they wanted to gouge out more profit, in the knowledge that enough desperate buyers would sign up (and conveyancers were completely missing the implications of escalating ground rents and not pointing it out). Pension funds need to accept that they invested in something unfair and immoral, and was already being heavily debated as far back as 2017, so was always a big risk.

A peppercorn rent for all is the fair conclusion, but power freeholders will no doubt try their luck in the courts and seek to delay its implementation for as long as possible – causing new paralysis to an already sclerotic flat market.

Knowing history is not on their side, you’d think freeholders would be smart and, at the very least, voluntarily introduce a retrospective ban on escalating rent reviews, with ground rent staying at the amount initially set out in the lease. A proposed 0.1% cap, whilst also suitable in theory, would cause too many arguments on the fair flat value (freeholders, left to themselves, would inflate) and using an independent surveyor could prove expensive for leaseholders. A cap to the original amount would see pension funds still get money, and leaseholders can sell.

It would, however, create a two-tiered flat market and lead to flats built before the 2022 Leasehold Act losing even more value – and potentially putting people into negative equity.

The right answer is clear, and hopefully the government has the fight in it to make the change needed – otherwise we are headed into a housing abyss.

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Maurice Cousins's avatar

Well said. Ground rent needs to go. And so does marriage value and forfeiture. We also need greater Right to Manage controls over OUR homes.

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Gavin's avatar

I've read this, and I think there's some dishonesty going on here:

First, on the one hand you argue (without evidence - ask any developer) that ground rents are not reflected in the purchase price of a flat. But you then go on to say that a good reason to peppercorn even non-onerous ground rents is that the "two-tier system" will significantly devalue existing flats with non-onerous ground rents, to such an extent that it may even put people into negative equity! So do ground rents affect the value of a flat or not? Or do you only decide that they affect the value of a flat when it helps your argument, and claim to the contrary where it hurts?

Secondly, on the supposed undesirability of a two-tier system: as you yourself say - this has always existed: there have always been peppercorn ground rents coexisting perfectly well with non-onerous ground rents throughout the 20th century. So long as ground rents are low, they have very little effect on the purchase price of a flat. This is a totally nonsensical justification for abolishing all ground rents.

On the point about RPI/paying more than the price of a flat, it's really just lying through compound interest. The fact tells you nothing more than that compound interest effects (ie, annual inflation rates) are extremely large on a long enough time horizon. It's a pointless stat in every other way, because wages/house prices will form part of that inflation statistic, and in the case of wages - will grow faster than RPI in the presence of productivity growth, and the meaningful fact for a leaseholder is that an RPI ground rent will actually fall over that time period relative to income (assuming this country ever actually gets some productivity growth again).

And on this "money for nothing" claim Rachel/LH activists frequently make, because I genuinely don't understand it: isn't the government's position that in some cases freeholders should pay for building remediation? Who is supposed to enforce covenants/terms of leases (often in cases where one leaseholder is negatively inconveniencing other leaseholders)? Is the idea here that the freeholder is supposed to have responsibility/jobs/liability but not have any right to any form of income in return, so it's effectively turned into some weird form of charity work? Or is the goal of peppercorn ground rents to have the freeholder charge directly through the service charge for the liabilities they take on/time they spend? Because that seems like a much worse solution - I think we can all see the usual freeholder suspects taking advantage.

I'll leave it there for now. But needless to say I'm also not fully convinced that we're heading into a "housing abyss" if £100 annual ground rents aren't retrospectively abolished without compensation.

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Gavin's avatar

I'll be the one to make the deeply unpopular argument then, with the disclosure that I like my freeholder (a pensioner who I know will struggle post-bill), and I also know something about the leasehold sector from a valuation perspective. Though I'll firstly say many of the provisions which stamp out bad behaviour in the bill are welcome, and in some ways don't go far enough - the existing forfeiture system should be overhauled so freeholders don't get the difference, and RMC's should be mandatory on most if not all new builds. I'm sure MPs see horror stories every day, and the bill should go maximally far in preventing/outlawing bad practice/behaviour from freeholders, developers and managing agents.

However, I really think this bill is too confiscatory, and in a way that is non-discriminating: it'll hurt good freeholders just as much as bad ones - including leaseholders who followed government advice and collectively enfranchised (more on this further down, and I really hope more attention is paid to this - I've seen no mention of it anywhere!). First, current legislation splits the extra uplift that results from a lease extension (marriage value) between the freeholder and leaseholder 50-50, but the bill would now give the leaseholder 100%. Government claims freeholders will be fairly compensated, but there is no negotiation in any market where 100% of the extra uplift resulting from a deal between two parties is taken exclusively by one party. In a true negotiation, the other party could just walk away so neither side would enjoy the uplift, so it's always split - and while the system (rightly) compels the freeholder to grant lease extensions on request if the offer is at market value, the handing of 100% of the marriage value uplift in a lease extension to the leaseholder means compensation will not be at a fair market value. There are many good arguments out there made by surveyors that the current marriage value figures are too high and should be reduced, but no fair arguments for giving the freeholder 0% of the extra uplift resulting from a deal between both parties.

Second, the proposal to cap all ground rents: the misselling ground rent stuff is scandalous, and where developers pushed their own conveyancers onto buyers, there should be retrospective caps (if not prosecutions). But to cap all reasonable, non-onerous ground rents would be remarkable: investors/my freeholder paid for these assets in good faith, expecting a dependable income based on the terms of the lease. But maybe more importantly: when a developer builds a residential block, they usually sell the freehold and the flats separately. The value of the freehold consists of the ground rent + reversionary value. This means the price the developers sell the flats for is roughly reduced by the price the developer sells the freehold for. So when we buy leasehold flats, the freeholder effectively subsidises the up front cost of the flat (so we pay slightly less - usually <5%). This doesn't actually make you better off - you've just got that difference in the form of a ground rent , but you're crucially not worse off because of the ground rent either, because you paid a lower price for the flat (Tim Leunig was good on this in his evidence). A retrospective cap on all existing ground rents would effectively amount to a full transfer in most modern flats of the initial value subsidised by the freeholder back to the leaseholder, meaning leaseholders get the "freehold" value of the flat despite only having paid the leasehold price - the difference having been effectively confiscated from the freeholder who subsidised that reduced price by purchasing the freehold in the first place!

I know we're all supposed to hate freeholders, and there is very real abuse out there, but this strikes me as an extraordinary intervention for government to make in the private market without paying compensation to the losers, and government needs to remember that not every freeholder is Persimmon or Mick Platt. Leaseholders who collectively enfranchised and bought out non-participants' ground rents will be affected by this too! In London (I'm sure true elsewhere), it's very often *residents* who participate in collective enfranchisements and end up having to buy out the marriage value or ground rents of investors who usually refuse to participate. The bill will confiscate the marriage value/ground rents that had to be paid for by those who enfranchised and will hand that value straight back to the nonparticipants without compensating those who enfranchised! This is surely unconscionable. Some leaseholders will have taken out mortgages to buy their freeholds and will need that value (marriage value or ground rents) in order to repay the mortgage they took out to enfranchise!

So there's my attempt to persuade you to not redistribute my freeholder's asset to me and the other leaseholders in our block. It simply isn't the place for government in a liberal society to interfere in reasonable private contracts. The focus should be on stamping out abuses/bad practice (and unreasonable private contracts), and I don't see how abolishing marriage value and all ground rents achieves that. It will unfairly hurt many people who bought freeholds/collectively enfranchised in good faith and did not use those investments to bully leaseholders.

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