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Commercial real estate
16 December 2019
On 27 June 2019, the government announced its proposals to legislate in relation to onerous ground rents and to prohibit the sale of long leaseholds of residential houses, amongst other unfair leasehold industry practices. This has been on the agenda for some time but has been put on the back burner due to Brexit and more pressing parliamentary concerns. However, this issue is once again on the parliamentary radar and will be tackled “as soon as parliamentary time allows”, although Boris’ recent election and his cabinet reshuffle may result in further delays in implementing these proposals.
A number of other issues are raised in the government paper, such as making it easier to extend leases or to acquire the freehold of a property. However, the two big issues for landlords are a ban on ground rents in new leases, or a ground rent reduction in existing leases, and a ban on long-leasehold houses.
The paper, published on 27 June 2019, states that the government will reduce ground rents on future leases to a peppercorn. This change has come about as there has been an increase in the amount of ground rent payable under leases and the frequency at which these are reviewed. The government is particularly concerned with ground rents which double less than every 20 years and which can make a property unsaleable or unmortgageable due to the extortionate ground rents payable in future years.
The government has not yet found a solution in respect of existing ground rents, as the legislation will not apply retrospectively. Property developers have begun to implement compensation schemes and the government is keen to see this extended to all tenants with onerous ground rents, including secondhand buyers. The committee concluded in the paper that any retrospective legislation should limit ground rents to 0.1 per cent of the present value of the property up to a maximum of £250 per year ($329.5) (and this figure should not be increased by RPI) or any other mechanism or that a compensation scheme should be set up.
This will obviously have a significant impact for landlords and developers once implemented; traditionally freehold reversions have represented a useful investment opportunity for high net worth individuals as they collect the ground rents due. With the return on investment drying up, this will undoubtedly have a significant impact on those individuals. Will developers try to compensate by increasing premiums?
The paper also states that, unless there are exceptional circumstances, all new-build houses will be sold on a freehold basis and there is an intention for this to apply retrospectively to existing leasehold houses. This change is a result of an increase in the practice of selling new-build houses as leasehold in recent years; a practice adopted by landlords and developers to generate a future income stream from the property from the ground rents and from the potential of selling the freehold interest for a premium.
This is significant for those with new-build property portfolios particularly, but will also affect those with existing leasehold houses. The ban will apply to residential long leases (of over 21 years) unless there is a legitimate reason why the land can only by owned under a lease. The government intends to implement the ban by making sure that applicants cannot register a long lease of a house at the Land Registry. Anyone who is the owner of a leasehold house which is registered at the Land Registry, will be entitled to purchase the freehold to the property (known as enfranchisement) at zero cost.
As with the ground rents, will developers simply increase the premiums that they charge for properties in the first place to compensate for the second, windfall premium on the sale of the freehold? That being said, developers will undoubtedly need to take account of the prevailing market conditions in order to avoid being priced out of the market. This is likely to impact investors most heavily who purchased freehold interests as an investment with the intention of selling them to the underlying leaseholders at a later date since the value of the investors’ portfolios will have taken significant hits as a result of this new legislation.
This article was originally published on 16 December 2019 in WealthBriefing: https://www.wealthbriefing.com/html/login.php?aid=185829#.XfdK0-j7SUk
16 December 2019
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