Leaseholders will continue to pay annual ground rent capped at £250 for up to 20 years in an amendment to the Leasehold and Freehold Reform Bill set to be announced today.
Housing secretary Michael Gove has been forced to water down the reforms in the Bill following resistance from the Treasury, according to a report in the Times.
Annual charges levied on leaseholders will now be capped at £250 rather than being cut to zero, or “peppercorn” rate, as first outlined in the Conservative 2019 manifesto.
Gove, who last year referred to leasehold as a “feudal system that needs to go”, has faced opposition from Treasury to his plans.
A number of pension and insurance funds have invested huge sums in ground-rent portfolios and an internal Treasury analysis suggests that up to £37bn of investment could be wiped out, which may lead to compensation claims aimed at the government.
There are close to 5m leasehold dwellings in England, according to Department for Levelling Up, Housing and Communities data published last May, which is 20% of the English housing stock.
Mark Chick, a partner at law firm Bishop & Sewell and a director of the Association of Leasehold Enfranchisement Practitioners, believes that the original reforms would leave the government open to “significant compensation claims”.
He added: “Some will say that this proposal does not go far enough and that the government should be aiming for a complete ban on ground rents.
“However, it seems very clear that the human rights considerations have been taken into account in coming to this proposal – and the realisation that a complete ban would more likely than not to lead to significant compensation claims having to be paid.
“The government no doubt wants to avoid having to pay a reported £27.3bn to compensate freeholders for lost assets.”
Chick also points out some reports say that the £250 cap could be “phased out over time”.
He continued: “How long will this be? Will there be a reduction down to zero?
“Either would have a significant impact on the long-term value of freeholds. Government has clearly undertaken a balancing act between the human rights considerations of ‘deprivation’ and ‘control’ of property in seeking to find a balanced solution.”
“Twenty years is not great — but it’s a compromise. We need to see the way the amendments are worded. There must be a clear end date.”
So does the proposal mean that current ground rents that are above £250 would be reduced down to £250?
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I certainly hope so and looking at the comments about compensation, it looks that way. Thats the right thing to do but they should make all new properties a nil ground rate. Be interesting to see exactly what the bill says.
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Such an ingenuous and triumphal reaction from Mark Chick, but to be expected.
Where’s his consideration for the human rights of the millions of leaseholders who suffer every day and every night from this awful practice? People who have scrimped and scraped to pull together a deposit to get a foot in the housing ladder, only to find they are subjected to exploitation, legal threats, uncontrolled and largely unaccountable service charges, often unnecessary ‘repair’ bills, and even the loss of their homes after paying their mortgage. People who’s health is being destroyed and are facing bankruptcy. But that’s all OK, just as long as the human rights of faceless offshore ground rents investors and pension funds who should know better, are protected!
In the face of overwhelming evidence, support from the APPG on leasehold reform, and recommendations from the CMA, the government has done what every leaseholder knew it would do, and capitulated to the powerful freehold lobby.
Pension funds would not have lost their investments; arguably, they shouldn’t be invested in this immoral feudal practice. They should have sold them long ago.
No mention of abolishing ‘marriage value’, I see. This is another wholly unfair practice, allowing freeholders to rake in many £thousands for their minimal investment. And no mention of controls on unrestricted and largely unaccountable service charges.
Yet again, leaseholders, who were initially buoyed by the CMA recommendations and government promises, have seen their hopes dashed.
I’ll be surprised if a single leaseholder suffering under this yoke will vote for this government. But I guess they don’t care any more, because they know they will be out of a job in a few months, so don’t need their votes.
So, it is down to Labour to do what they’ve said, and end leasehold in their first 100 days. Any leaseholders out there care to put some money on that?
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Labour PMSL.
They’ve never done anything positive for the housing market. Ever.
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A residential lease is basically a long term contract.
The value to the freeholder of the document is made of three parts:
(BTW – I’ve removed a few steps and rounded some numbers otherwise it would get horribly bogged down with explanations)
Let’s assume that we are looking at a flat in nice condition – nothing special, just average and normally saleable. It’s worth £250,000 if we assume that it has a nice long lease and a boring, inoffensive ground rent. It started with a 99 year lease from 25th April 1975. The ground rent started at £100 per annum and doubles every 25 years. Today there is precisely 50 years unexpired of the lease term. The ground rent this year is £200 per annum but it goes up next year to £400 per annum and to £800 per annum in 2050.
i) The ground rent – the lease is a basically a promise to pay a ground rent in return for the occupation of the property. It is possible to work out the “present value” of the promise to pay the rent – in this case it is £7,200. This is basically a lump sum figure of how much the freeholder would need to invest to give them the same benefit of the ground rent income stream over the next 50 years.
ii) The reversion – at the end of the lease the leaseholder must renovate the property and hand the keys back to the freeholder. The promise of getting the keys back in 50 years is worth something today – in this case it’s about £22,000.
iii) Marriage value – as the lease gets shorter, the value of the flat goes down and the value of the freehold goes up. The difference between the two is called Marriage Value. In this example, the flat is calculated to be worth approximately 70.7% of it’s full “long lease” value., i.e. something in the region of £177,000 with the short lease. That’s a difference of £73,000. However, the value of the ground rent and the reversion are deducted from this, to make a full marriage value in the region of £42,000 which is then split 50/50 between the freeholder and leaseholder for the purposes of the calculation, i.e. £21k each.
The total lease extension premium (under current regulations) would therefore be in the region £50,000.
Capping the ground rent to £250 for the purposes of the calculations would see a reduction of perhaps £4,800 which is quite significant.
Importantly however, it would appear that the Government is being persuaded to not look after leaseholders in the way they initially promised… So what happens to the proposal to remove marriage value from the equation?
The amount of money tied up in ground rents is perhaps £37 billion pounds.
The amount of money tied up in Marriage Value is likely to be somewhere in the same region. How much? I don’t know. But let’s see if we can work it out.
5.3 million leasehold properties. Let’s assume that two thirds of them have unexpired lease terms that are longer than 80 years so that Marriage Value is already not a consideration.
Let’s assume that on average, the 1.75million flats that remain all have unexpired lease terms at an average of 60 years (some will be more, some will be less). This means that with a short lease they would be worth approximately 78.3% of their long lease value.
Let’s assume that the average “long lease” value of each of the flats is £245,000 (HPI England & Wales – Feb 2024). Let’s also assume a normal ground rent for each flat, say starting at £50 per year and doubling every 25 years.
The total lease extension premium would be £33,750 with £13,250 for the reversion, £2,750 the PV of the ground rent and marriage value would be approximately £17,750 per transaction.
This would mean that the total latent Marriage Value to be removed from freeholders’ pockets would be in the region of £31billion.
If the Government can be persuaded by the pension funds about the ground rent cap, what about the removal of marriage value from the calculations? Surely the same considerations apply.
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Quite right. Michael Gove seems determined to confiscate assets from their honest owners and redistribute them to try to gain popularity… like some kind of third world tinpot dictator.
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