OPINION: Why changes to ground rents may not be all good news for leaseholders

The Leasehold Reform Act and its aim to abolish or cap ground rents, eliminating the perceived exploitation of homeowners and making it easier and cheaper to purchase freeholds has sparked ongoing debates about whether or not it would be a positive transition.  Last December, Housing Secretary, Michael Gove, launched a consultation on part of the proposals.

David Goldberg

David Goldberg, CEO of property management services company POD Management, offers his opinion of why changes to ground rents may not be all good news for leaseholders. More specifically, he says that abolishing ground rent could, in practice, negatively impact the long-term safety of leaseholders and promote further bad practice by freeholders.

It’s important to recognise the positives that will come from this reform; the change is complex and not every potential outcome will be negative. For example, it will give leaseholders more power and control, make it easier to enfranchise (buy a freehold), necessitate greater transparency over service charges, remove opaque costs/commissions, and make it cheaper to own a leasehold by removing a yearly outgoing.

However, many believe abolishing ground rent will tackle the issue of spiralling service charge costs – I disagree.

Although some costs come from property managers or freeholders adding costs in a clandestine way, they are the minority. This reform is a sledgehammer approach to a limited issue; most property managers operate professionally, and the real problem is that leaseholders often don’t understand what a managing agent is responsible for, the time they invest, and the necessary costs involved.

Addressing these misconceptions would be much more effective strategy, especially when considering the potential consequences that come with abolishing ground rent.

Firstly, this would remove income for freeholders. Without any financial incentive, why would they accept the responsibility of maintaining common areas? There will be nothing to offset their risk and no justifiable reward.

The law is robust in that, should a building fall into disrepair, the freeholder must step in to carry out and fund the works until monies can be recovered from leaseholders. If ground rent is removed, how are freeholders expected to front these costs?

Meanwhile, should leaseholders take control of their freeholds, the responsibility to front costs would fall onto them – how would they fund this if there is a proportion of fellow leaseholders unwilling to contribute?

Additionally, in some instances a specialist set of property management skills is required to ensure the right works are carried out, particularly when it comes to safety and compliance. I question whether lay people will make the right judgements about what’s required and when costs are necessary, in an attempt to limit the cost of service charges.

The law surrounding leasehold is extremely complex, with many areas that could trip people up if they don’t know what they’re doing; at POD Management, our specialist team members undergo extensive training and have years of experience – I would not expect leaseholders to have this level of understanding, but it is crucial.

I am also concerned about the changes encouraging already unscrupulous landlords to be increasingly unethical in their business, using immoral tactics to offset lost income. Ultimately, they do this to make money; if their income is cut off, they will look to claw this back. I foresee them finding ways to extract income from managing agents and contractors appointed to maintain the building they are responsible for, ultimately increasing the cost for leaseholders as firms pass the cost on to the end consumer.

The intention behind this reform was right; to give leaseholders more control. However, I do not believe abolishing ground rent was the answer. Instead, they could have looked to professionalise freeholders, ensuring they have certain qualifications or capital requirements to be in business, make their position more stringently regulated, and educate leaseholders about the true costs of owning a shared asset.

In practice, this would have improved the transparency of our industry without creating unnecessary risks.

 

 

 

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9 Comments

  1. Targeting 3 week exchanges

    I don’t agree.

    All the positives would result, and none of the stated negatives.

    The leaseholders would have the option to still employ a managing agent.

    Get the reforms done. Now.

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  2. EAMD172

    I own a freehold house and am not in need of help to maintain it. I can employ people to carry out necessary works. I also own a flat where we own a share of freehold and it is managed by a managing agent that gets paid to ensure all maintenance is done and projected maintenance is allowed for. If you own a property you always have to allow for maintaining it. This article makes out that people are stupid and can’t be trusted to maintain a building. If that was the case they probably shouldn’t be trusted to buy in the first place. We are not idiots. Ground rents are a rip off as you get nothing in return. The freeholder instructs a managing agent that gets paid to do a job so what is the extra ground rent for?

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  3. johnclay

    You state “most property managers operate professionally”

    What planet are you on?

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  4. ldyajmf

    Not addressing the 2 core issues here, as most people with vested interest avoid engaging with…

    1.) Mortgage lenders (and CMA) are now saying that any property with a GR above 0.1% of the property value is unmortgage able (and hence worth £0). Conveyancers are advising clients not to buy ones coming close to 0.1% in a few years. In a high inflation and dropping flat prices economy/market, most leasehold flats built in the past 15 years (which have, at best, RPI GR reviews every 10 years) will go over 0.1% in the next decade. Furthermore, if GR goes over £250 and thus an AST liability (when out of London) – which most get to after their first RPI review – then again they can’t get a mortgage. So a GR cap is essential to unfreeze a broken flat sales market. Totally understand keeping GR for existing leases, as people bought knowing they had to pay a small annual sum, but escalators should be retrospectively banned – and blame the banks for their intransigence here, as it is bonkers that a £400k flat can be mortgaged and sold when paying £300 a year GR, but is then worthless when that GR goes to £401….Of course freeholders, who have sold these GR’s as an asset class with a promise of guaranteed growth over hundreds of years, are refusing to budge, and charging many thousands for a deed of variation. They are basically willing to see millions left in financial destitution by being trapped in unsellable flats. The government has to step in therefore.

    Oh, and GR has been banned since 2022, but hearing the freeholder lobby speak, you’d think any flat built since then is a dogs dinner and about to fail miserably….?

    2.) Leaseholders are not calling to completely self manage their blocks, all they want is the control to hire and fire their own managing agent – who they recruit to manage all the complex admin that goes with it. Plus, choose the services they pay for. Free market economics makes companies perform – as they know that poor service and price gouging leads to the consumer choosing to go elsewhere, and they go bankrupt. In the current leasehold market, most leaseholders cannot choose their managing agent or what services they pay for (unless RTM or RMC structure) – a distant freeholder signs if off. This often means terrible service and pricing (and even corruption) is allowed to go unchecked. Leasehold is a classic monopoly and needs to be unlocked. RTM and RMC is there, but current rules make it hard to have those setup.

    Our flat market is crumbling due to this toxic setup (and don’t get me started on fire safety…), but too many people with powerful vested interests have benefitted from its antiquated structure, and are fighting to keep it as is. Even if this means hundreds of thousands of starter homes/flats are becoming worthless in the next decade, at a time when we already have a shortage of starter homes….! I agree, many leaseholders do not understand the complexities or even costs of maintaining buildings, but giving them free choice should never even be up for debate in a modern economy/society.

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    1. LVW4

      I couldn’t have put it better!

      I hope the government does not cave to the freehold lobby, which includes immensely wealthy people such as the Duke of Westminster, shady offshore investment companies, and pension funds, some of which aren’t even for UK pensioners, who have invested in ground rents in England & Wales [note, not anywhere else!] because they knew they were zero risk and highly profitable, for a very minimal investment. #NationalLeaseholdCampaign

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  5. Bendylendy

    You haven’t addressed the main issue for leaseholders now and that is that lenders will not touch leaseholders that have onerous ground rents with a barge pole! So there is no argument – ground rent ultimately needs to go.

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  6. lkp

    David’s comment happen to reflect those which come from developers and landlords over many years. The problem is there have been no ground rents on newbuild since 2022 and yet somehow the sky has not a fallen in.

    There are very few leaseholders who would accept the landlord would spend ground rent funds to remediate a building falling into disrepair. The fact the government is forced to take various major landlords to court to force them to pay to remediate cladding impacted buildings suggest David’s argument here may be flawed.

    David then sets out a further argument to suggest leaseholders would not have the skills to run their own building. He perhaps forgets which profession he’s in. Leaseholders would not run complex blocks in the same way ground rent investor landlords run few of their own buildings. Both the leaseholder and landlord would appoint professional agents like David.

    When David gets to his argument about unscrupulous landlords finding a way to get their money anyway so why not give them ground rent the moral compass fell on the floor. He at least makes clear the idea that some landlords are not as ethical as they claim to be.

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  7. scmurphy

    This is just the same old stuff that get’s rolled out by those with a vested interest in property ownership not changing away from freeholders in favour of the 5 million leaseholders in England and Wales. Leaseholders have suffered enough under the archaic freehold-leasehold tenure. I don’t agree with several assertions here:

    1. The Leasehold and Freehold Reform Bill would better serve leaseholders by abolishing leasehold in favour of commonhold and a phased implementation. Anything less is tinkering with the fundamental problem which is tenants, not absentee freeholders grazing on ground rents, should own the freeholders of their properties. Gove himself recognises the freehold-leasehold system in England and Wales is ‘unfair and feudal’. It facilitates the misuse of legal loopholes for bad actors – ground rent abusing freeholders and unprofessional scamming property managers with ‘bastard tendencies’ – big enough to drive a Maserati though.

    2. Freehold ownership should be in the hands of tenants through commonhold or at the minimum the less than ideal share of freehold. Everywhere else on the planet has abolished the freehold-leasehold tenure system in favour of some form of tenant owned shared freehold title – condominium, strata-title etc. There are 10’s of millions – orders of magnitude more tenants everywhere else managing their properties just fine under these better, fairer, more modern systems of apartment ownership and management that rely on modern contract law not archaic feudal property rights that disenfranchise tenants. When tenants own their properties, incentives are aligned for better outcomes for tenants. Arguing the details of ‘ground rent this or that’ is a distraction from the original sin of the freehold-leasehold system which is it is designed to legally benefit freeholders and their service providers over tenants. Bad actor freeholders and their service providers are happy to exploit the law in their favour for profit at every opportunity. The sooner tenants have freehold ownership of their properties in England & Wales the sooner we’ll get to a better fairer tenure for them. Abolishing ground rents isn’t the answer, but it is probably a part of it. Absentee freeholders are happy to give companies like POD Management wide scope to do what they want and charge leaseholders pretty much whatever they like because they are literally absent, and mostly only in the game for ground rents or to use the asset to raise funds for something for profitable somewhere else. Their mind is not on delivering excellent accommodation services. Property managers have free reign to do what they like so they do. Leaseholders are forced to pay or be threatened with leases forfeiture for charges as low of £350.

    3. The 10’s of millions of condominium, strata-title freehold sharing apartment owners around the world work directly with their service providers contractors, and the tenants set the terms, the tenants pay them and the tenants give them instructions for the day-to-day property management of their most important assets. If the tenants want to fire the property manager for underperformance, they can and will. I expect any change in this direction of a more performance oriented, free market for property managers would concern the CEO of POD Management. No wonder you’re so energetically arguing the case for everything to remain just as it is because it suits POD Management to have an easier time of it. However, you are arguing the case against a free market, against the rights of leaseholders to own and have a greater say in the management of their homes and I don’t know how you can do that in good conscience. Why do think so poorly of your fellow English and Welsh countrymen that they couldn’t do as good a job managing their most important asset via service providers as an apartment owner in the USA or Australia?

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    1. LVW4

      Indeed! Incidentally, we’ve had Commonhold on the statute book since the Commonhold & Leasehold Reform Act 2002. The developers chose to ignore commonhold in favour of monetising leasehold by circumventing the law [I wonder who drafted that little gem into the Act?] to enable them to sell
      the ground rents to investors, who employ managing agents to exploit the law and leaseholders.

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