As first-time buyers fall to the lowest level in a decade, Michael Gove continues to show what a slim grasp he has on economics, investment and the current housing crisis, by threatening to plunge the residential property sector into further crisis. His proposed reforms to ground rent payments to building owners will no doubt strike him as a pre-election vote winner, but the reality is far more complex.
When people buy a leasehold flat, they sign a contract agreeing to pay their fair share of the upkeep (service charges) and in many cases a ground rent (at an average cost of £298 a year according to the Government’s own data. The latter has been whipped up by the Housing Secretary as an unfair payment in return for nothing (which of course it is not), and he has decided that this is something worth tackling.
The government has already banned ground rents on new leases, but Mr Gove now wants to go further and ban ground rents on current leases. The government’s own research suggests this will cost the pension industry, the biggest investor in ground rents, £27.3bn. His response? “The pension industry can invest that money elsewhere”. He seems to forget that once he has rendered those investments valueless, it’s rather hard to sell them to anyone else and get your money back. Indeed, some property funds have already suspended trading.
So, perhaps unsurprisingly, the industry is likely to take the government to court over the “smash-and-grab” raid – and if they win the taxpayer will be paying back the £27.3bn. More broadly, industry experts (including the ex-chancellor Phillip Hammond) are desperately courting the pensions industry to invest in the UK rather than elsewhere in the world. However, the Government’s planned retrospective interference in existing property rights is akin to how a high-risk emerging market country operates; so why would pension funds invest here when Mr Gove is demonstrating that the UK is not a country for long term investment, and whereby a capricious government can simply take everything away at the stroke of a pen?
Next, let’s look at what this means to those soon-to-be independent flat owners. With no ground rent income, and in the absence of compensation being paid, many building owners will become insolvent overnight. So, who will run the building on a day-to-day basis? Mr Gove will no doubt say, “the flat owners themselves – hurrah”. But this overlooks the Governments own research, conducted in the first half of 2022 and quietly released on the last day of Parliament in July 2023. Why quietly released? Because when people were asked if they wanted to run their own buildings, 5 out of 6 responded with a very firm “No thanks”, with quotes like “I don’t like the idea of taking over management. Too much responsibility, too stressful”, and “I work full time and then on my days off, I want to relax and see my friends not be dealing with what would seem like another job”.
In a further example of the Doctor Doolittle “Pushmi-Pullyu” style legislation, those flat owners that Mr Gove wants to run their own blocks might be even more reluctant to do so when they realise that they face potential jail terms under the recent Building Safety Act.
But will flat owners simply get handed the freehold from those insolvent landlords? I’m afraid not. Instead, through legal process called “bona vacantia” (a difficult concept, but one that will have flat owners lying awake at night if Mr Gove has his way), the freehold will instead usually pass to the Crown. But does this mean that King Charles III will now have to deal with disputes between neighbours, health and safety (including all those buildings with cladding), insurance, and the day to day running of the building. Sadly not, as is made very clear by those handling bona vacantia properties on his behalf.
But won’t the managing agent (if there is one) do all of that? Sadly, no as their contract would have been with the old landlord, so they will no longer have the legal authority to spend any money. And to rub salt into the wound, the sales process will immediately grind to a halt, which will almost inevitably lead to a crash in the flat value of those people that Mr Gove thought he was helping.
So, in one fell swoop Mr Gove will stall the cladding remediation projects, tie the taxpayer up in a ruinously expensive legal challenge, destroy the UKs credibility in the global investment arena, force a reluctant public to work in their spare time to look after their building and crash the housing market. But at least flat owners will be a few hundred quid a year better off.
Mick Platt, director of The Residential Freehold Association
Leasehold reforms a step in the right direction but more work to be done
Anything that Joe 90 touches goes wrong or costs a fortune.
I wonder if he’ll get a job with the Mones after the next election.
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Gove and naive in the same sentence, surely not?
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I agree that his proposal is madness but when you say that ground rent is not in return for nothing, what exactly do flat owners get for their (average £298) annual ground rent? Service charge is accounted for but he’s right that ground rent is pure profit with nothing in return.
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Totally agree.
This article on behalf of freeholders is naive; designed to frighten leaseholders. But Commonhold was established in law in 2002,but it’s the freeholders and developers who have thwarted the spread of Commonhold, as they have made themselves fat on their minimal investment in ground rents.
In insurers haven’t already sold out of ground rents, they are stupid. But we already know that following the exposure of their risky pensions investments during the Truss debacle.
Leasehold must go! It has everywhere else except England & Wales. Why? How? No big compensation payments in Scotland to my knowledge.
We already have Right to Manage and Right to Enfranchise, where the running of the buildings are taken on by leaseholders. We have share of freehold, again, managed by leaseholders. Why should this be different?
I smell freeholder fear and panic, with many already offering their freeholds for sale to leaseholders.
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The law is not really ready for commonhold because without a lease there is no effective way in English law to enforce positive covenants.
There are plenty of ground rent at a fairly nominal amount and the very fact that a lessee must pay it results in an up to date record being kept of who in fact is the owner so that service charges reserved under the lease, and usually as additional rent is actually readily collected. Leaseholders do not always have an argument as to why they should not pay service charges, but simply that they budget for what is the most pressing expense on their agenda. There are always a proportion of leaseholders who will not pay if they have to pay. If and when Commonhold becomes workable there would have to be a robust enforcement provision. Service charges do not necessarily become cheaper if levied on behalf of a leaseholder run company.
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Sorry to be so blunt, but leasehold makes me so angry. You are talking freeholder nonsense.
Commonhold has been law in England & Wales since 2002.
Nobody is saying we must do away with managing agents. We must do away with corrupt and greedy, freeholder associated managing agents. As for ground rents, they are for no service, as many have said.
But, I’ll bow to your obvious superior knowledge if you can explain what service the freeholder delivers in return for the ground rent. Although, it can’t be much if ground rents were historically very low or peppercorn.
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Sometimes there can be a highly complex Insurance claim and as the insured the freeholder has a lot of work to do to resolve how to proceed; at other times where the leaseholders have a Management company to run the common areas there is nevertheless work to be done to enforce the Management company to discharge its duties effectively and timeously. Likewise leaseholders don’t particularly enjoy litigating against neighbours who refuse to pay service charges; whereas such management companies can obtain judgements (but rarely bother) the freeholder can get roped in doing a lot of work to recover unpaid service charges due to lessees management company because it alone can sue with the weightier stick of ultimately the threat of forfeiture. The court will almost never grant forfeiture but the leaseholder must address the complaints to defend it.
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The ground rent is a payment for no service, ground rents were a very low payment for decades, around 20 years ago the leasehold industry started to produce leases wher the ground rent grew over time.
This greed on the part of the industry will be their downfall. the previous ground rent payments are enough compensation for the freehold, investments can go down as well as up.
Why does the Resident Freehold association think that leaseholders can’t manage their own properties? They won’t be actually managing them, they will employ someone to do this, someone that they are in control of who they can hire and fire if they aren’t doing a good job.
The average freehold value is 2.5% of a properties value, while the leaseholders value is 97.5%, why should the Freeholder have this power & control?
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Perhaps if Mr Platt and his organisation had spoken up over the last 20 years during which the leasehold system has been relentlessly abused by freeholders and construction companies to milk leaseholders for stepped ground rents and grossly inflated charges, in particular for insurance, there would be no need for Mr Gove to get involved. There are countless blocks and houses across the country where properties are already unsellable due the systemic abuses inflicted on leaseholders and that has to change. In short, Mr Platts members are shortly to reap what they have sown.
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the abuse where it has occurred has been not across the whole sector. There are good freehold landlords as well as some who have been selfish. The proportion of ground rents of the whole that are subject to egregious increases are a tiny part of the whole sector, something like a fifth of one percent. The Government cannot justifiably just scrap ground rents. It would end up costing the taxpayer a lot of money in compensation for all leaseholders to be relieved of the duty to pay any ground rent. If you look at a lease the ground rent is in any event reserved as consideration so it was not intended that any service would be provided for payment of ground rent to be due. It is part of the price of the flat for the owner and subsequent assignees to pay a predetermined sum annually
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You really cannot continue defending ground rents. You need only to look on #NationalLeaseholdCampaign, to see the misery leasehold is causing to millions across England & Wales.
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I pay nearly £1200 a year on ground rent plus my service charge on top to two different companies – almost 2500 in total. And that amount is not fixed meaning I will be paying more year on year. I pay ground rent and receive nothing in return, it is my service charge that pays for building maintenance . How is this fair and how can you seriously try and justify that the building company deserves this money? Ground rent needs to be abolished and all the so called issues you mention can be easily overcome. The current system of ground rents protects profits for building companies and should not be prioritized over tenants.
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Well put! Thanks
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I’ll have to fetch my tiny violin.
Yawn, same old fear mongering. Ground Rent is simply a charge for absolutely nothing. A licence to print money.
I don’t imagine many leaseholders would dispute fair and transparent maintenance charges, after all is it not in their own interests to look after their investments? Their homes?
Ultimately all investments have their risks, anyone with half a brain would have foreseen that this outdated system had an expiry date. My thoughts and prayers are with you at such a difficult time x
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I bought my freehold using enfranchisement, the ground rent was only £5 every 6 months, the freeholder did everything they could to slow down this process, this is because they are hoping to benefit financially from permission fees which are far in excess of what the freehold is worth.
My freehold was purchased by them for less than £200, when I first enquired they wanted £4250.
I ended up paying £250 after a long 18 months enfranchisement.
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It is in the country’s best interests that we have good housing stock that can be bought & sold without worrying about any extra charges.
I am lucky enough to live in my own house which I have worked very hard to buy, in the future I might want to downsize to an apartment, why should a property that I buy be under the control of a 3rd party who has paid a pittance for that right.
Apartment owners need to be in control of the company that does the upkeep on their building, the current system isn’t in place in other countries, why put up with it here?
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The Residential Freehold Association is a pressure/ lobby group on behalf of freeholders – i.e. those who are about to lose money and are fighting hard to hold on to their shiny cash-generating bits of paper.
Their domain name was registered on 21st July 2022. The website has been through several iterations (see the Wayback Machine) but the latest version has removed mention of their membership list which apparently included:
* The Wallace Partnership Group Limted – Mike Platt is the MD of this and a further 17 companies with an overall admitted Net Worth in the region of £473m.
* E&M Management Ltd one of the larger freehold management companies in the UK which in and of itself only has an admitted Net Worth of £8m. However, Mr Proctor, its oldest serving director, is also the director of a further 187 active companies which appear to have an overall admitted Net Worth of £1billion.
* Homeground Management Limited – a relative minnow as far as I can tell.
E&M’s registered office at Berkeley House, 304 Regents Park Road, London, N3 2JX – this is where a huge number of freehold companies are registered.
It’s simple really – the whole freehold/ leasehold system is working entirely as intended… It keeps rich freehold landowners nice and wealthy and keeps poor leasehold occupiers poor and downtrodden.
It has always been this way. It’s just that no-one explained it to normal people.
Then, as with all things, a few rotten apples took it just that little bit too far and suddenly called attention to the inbuilt iniquity of the system.
Now, call me cynical if you like, but if this new legislation comes in and then gets resoundingly trounced in the courts, we end up back to square one.
Sooo, if the Conservatives (i.e. Gove) make the new law as unfair as possible to freeholders, the freeholders might be able to bring a successful challenge under The Human Right’s Act and perhaps get it overturned. Certainly, whilst the challenge goes ahead, the market for flats with short or short-ish leases will be at best “on hold” or at worst in complete chaos.
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No collective economic benefit from this whole charade, consumers are paying passengers.
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PLATT’S NAIVETY OF AN INDUSTRY CHALLENGE
Obviously freeholders (pension industry or otherwise) are ignorant that the Limitation Act 1980 places no time bar for tenants’ counter-claim (or indeed pleadings) for the return of fraudulent profits and concealed secret commissions on insurance etc.
Suggest all readers check out SECTION 32 (POSTPONEMENT OF LIMITATION PERIOD IN CASE OF FRAUD, CONCEALMENT OR MISTAKE)
LIMITATION ACT 1980.
The 5 million tenants (in the style of Mr Bates) say to Platt’s industry “Bring it on, mate.”
Better still, this nation loves a TV drama with the underdogs revealing greed, arrogance and cover-ups. Perhaps Platt might play himself as the brave leader of the fleeceholders?
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Considering the position that he holds, I am amazed by Mr Platt’s apparent lack of knowledge of this subject. Freeholders do not “run the building on a day to day basis”, this is done by management companies who charge the owners of the individual flats for this service…it’s called a service/maintenance charge Mr Platt! Admittedly, sometimes the Freeholder administers these charges, but not always. Even if the Freeholder does do this, it would be extremely simple to set up any payment direct from flat owners to maintenance companies. Has Mr Platt never heard of “peppercorn ground rents” or “share of freehold” arrangements? His apparent lack of knowledge in this regard pretty much undermines any other points he may try to make in this piece.
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Smacks of desperation. They’ve had a free run, with the law on their side, for far too long.
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The author is forgetting one fundamental point here. The freeholder lobby will say that doublers are the only onerous ground rents, but mortgage lenders – the real decision makers on what is onerous or not – are dragging more and more GR terms into that bucket, and hence valuing more and more flats at £0. The govt says the average GR nationally is £298 per annum. Lenders increasingly state that any GR that will in future rise above 0.1% of the property value (which a standard 10yr RPI linked review, of which there are many many thousands, will often do after the second review) or if it will become an AST liability (again, will do after the first or second 10yr RPI review out of London when AST kicks in at only £250). So any RPI linked review that is less than say, 25yrs, is becoming toxic to lenders/buyers. Conveyancers are also becoming more cautious and demanding a DoV for terms that were acceptable only 12 months ago. And if the RPI review is compounded, then that works out as worse than a doubler anyway (which often stopped doubling after 60ys) – someone with a 10yr compounded RPI term will end up paying more in GR over the length of a 125yr lease than they paid for the property in the first place! This whole issue has come about because the freeholders and developers got too greedy, and because you refuse to amend onerous leases without charging leaseholders many thousands. That greed is coming home to roost. The government can’t stand by and watch hundreds of thousands of flats slowly become worthless over the next 20 years, due to GR clauses, when we already have a chronic shortage of housing stock. Hence why a cap is being suggested. You’re incapable of self-regulation, so the government has to step in.
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Excellent summary. I’ve just read the Law Commissioner’s evidence submission to Parliament in support of the reforms, and it is overwhelmingly supportive of leaseholders. We now need Parliament to get its finger out and press ahead. The status quo is indefensible.
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