Real Estate Investment:Today

Feature: Another move on rising ground rents but flawed system remains

By Jonathan Frankel, managing director of private client and leasehold enfranchisement at Cavendish Legal Group, part of the ONP Group

We are sure it is welcome news that expensive rising ground rents are no longer a problem for thousands of leaseholders in properties owned by fifteen housing associations and investment firms.

These 3,400 home owners now have their ground rents held at the amount charged when their properties were first sold, after the companies which own their dwellings agreed to remove terms that caused their ground rents to double in every 10 or 15 years.

This latest move on doubling clauses in ground rents appears to have been triggered by enforcement action launched by the Competition and Markets Authority (CMA).

Last September the CMA secured an undertaking to remove the clauses from housing developer Countryside, which had sold freeholds to the fifteen businesses, and this latest response points towards the likely scenario of ground rents eventually being a thing of the past.

However, until that happens what we are seeing is a situation whereby some housebuilders have already agreed to scrap controversial rising ground rent terms in response to the action by the CMA, rather than waiting for legislation to pass through its turbulent and lengthy journey before becoming law. We anticipate that more housebuilders will follow suit.

While it is very welcome that thousands of leaseholders have now been freed from having to pay costly doubling ground rents, the fact is that there are many thousands of other leaseholders whose lives are still on hold because of the flawed system of ground rents.

Owners of leasehold properties whose landlords have not agreed to change terms that allow doubling ground rents are also unable to benefit from the new Leasehold (Ground Rent) Reform Act.

This is because the Act only applies to new leases, making ground rents in them token, or ‘peppercorn’, and preventing freeholders from introducing onerous increases.

For property owners with unfair ground rents on existing leasehold properties, the question remains: ‘What do we do now?’

The answer is that the only immediate way of resolving their situations is through leasehold enfranchisement.

Many people have never heard of leasehold enfranchisement. So what is it, and what does it involve?

In essence, leasehold enfranchisement is a legal process whereby owners of leasehold flats and houses can compel their landlords to extend their leases or acquire their freeholds. For flats, it is governed by the Leasehold Reform, Housing and Urban Development Act 1993. For houses, it is governed by the Leasehold Reform Act 1967, both as amended by the Commonhold and Leasehold Reform Act 2002, and now the recently introduced Leasehold Reform (Ground Rent) Act.

Extending a leasehold is important for anyone with a residential leasehold property with an unexpired term of less than 80 years, as a longer lease may be needed to sell or remortgage the property. The cost of extending a lease rises as the length of the lease gets shorter, more so when it is below 80 years.

At Cavendish Legal Group we represent leaseholders trapped in homes they are struggling to sell or mortgage as a result of unfair ground rents, and liaise with their landlords to ascertain if they would voluntarily agree to remove onerous ground rent clauses.

Part of the process involves initiating a formal request on behalf of the leaseholder, advising that while it may be possible to take the statutory route and reduce ground rent to a peppercorn, it would be preferable to do that now whilst our client seeks to extend their lease voluntarily.

While leasehold enfranchisement requires a financial outlay on the part of the leaseholder, it could make their property more mortgageable and attractive to prospective purchasers within a timeframe of around 4-6 months on an average time to get to completion.

The formal statutory lease extension process requires that the lease is extended by 90 years and the ground rent reduced to a peppercorn. The leaseholder is obliged to pay both their own legal and valuation costs and those of the landlord, however the legislation requires that those costs be reasonable (and subject to determination if not) – meaning landlords cannot obtain the services of the most expensive lawyers and valuers just because the leaseholder will be footing the bill.

Another option is to seek non-statutory, or voluntary, lease extension outside of the terms of the Act. This is a more flexible approach that does not guarantee the leaseholder a 90-year extension, and instead the leasehold term is negotiated with the landlord. There is also no guaranteed peppercorn ground rent.

It is important to note that if a voluntary lease extension by variation (not through the Act itself) is agreed then the existing ground rent provisions apply to the existing term of the lease prior to its term being extended. Therefore, a new lease being extended informally by deed of variation to another 125 years will still have to pay the contractual ground rent under the existing lease until the new extended term comes into play.

At a result, tenants could still find themselves subject to escalating ground rents – as per their existing lease terms – and the complexities of leases that have been extended in this way could require expensive revision and might hinder property sales.

A statutory solution though leasehold enfranchisement is at present the only way to guarantee an immediate lease extension and a peppercorn rent. Although regarded as a more expensive approach than a voluntary lease extension, it offers leaseholders a solution by providing certainty and comfort to those leaseholders who find themselves trapped because of legal paperwork that they do not understand, and often coupled with difficult landlords who will not agree voluntarily to alter the lease terms.

While there is a financial outlay involved, this is arguably offset by the potential value added to a property that had previously been unmortgageable or unsellable because of a short lease or rising ground rent. It is likely that the premium and costs paid for securing your lease extension may increase the property by an equal or greater amount.

Furthermore, leasehold enfranchisement may be the only realistic course of action in the short term for leaseholders with doubling ground rents whose properties are unlikely to be the subject of action by the CMA that might prompt a voluntary response from the freeholder.

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