Reforming Ground Rents in England and Wales

RICS has responded to the Department of Levelling-up, Housing and Communities (DLUHC) consultation on changes to ground rents, which is part of a much larger series of reforms to the residential leasehold and freehold sector.

Through the formation of our response, RICS engaged with a range of stakeholders representing leaseholders, freeholders, investors and the wider property sector, including DLUHC representatives. RICS welcomes the opportunity to respond to the planned reforms by DLUHC, and any measure to protect leaseholders from rapidly rising ground rents, with little transparency in return is good news. However, given our role in the sector it is important that we analyse the detail of the planned changes to ensure leaseholders are truly protected and the investment market remains an attractive proposition to meet our vital housing need.

The use of language

Within our response, it was important to highlight that a lot of the government’s language was centred on onerous ground rent rises. Whilst having a significant impact on those affected, they represent a very small proportion of the several million properties currently paying ground rents.

At the commencement of the reforms, the Secretary of State set out to protect leaseholders from future ground rent challenges and those who have witnessed onerous growth in recent years. This helps set the framework for reviewing the government's proposed options.

The risk of reform

Investors, including pension funds, have long used property with ground rent charges as a source of investment. While modern pension funds have moved around from investing in property with ground rent charges, historic investments remain for potentially hundreds of thousands, if not millions of pensions.

Through our discussion with the industry, it also became clear that several freeholders use ground rent as a form of debt restructuring plans – so any reform risks long-term financial planning.

RICS is also aware of the impact of market uncertainty, not only on valuations, new leases, and extensions - but also on investments. It is already well documented that several investment houses have temporarily suspended investment in certain property funds pending the outcome of these reforms. For this reason, and to ensure the market continues its essential role in developing future homes, the government needs to give its final decision in a matter of months, coupled with a clear implementation plan.

The reforms could also see several freeholders with little option but to exit the market. If this were to happen, depending on freeholder appetite to take on an existing block, the government risks having to pick up the management until a form of resident management company or commonhold is created. Which could mean residents taking on the management of their block when they have not been prepared to do so.

Furthermore, RICS expressed concerns about the implications towards building safety remediation. While the Building Safety Act protects leaseholders to an extent and developers/freeholders are contributing to some of the costs, reform to ground rents, while not specifically used for remediation works, will impact the overall income. This could potentially impact a freeholder’s financial planning along with their remediation strategy and could require a further analysis of the financial viability to commit to certain works.

Ensuring transparency

Underpinning the planned reforms, the language from the government has focused on transparency. For this reason, it is important to highlight the role of the RICS Service Charge Residential Management Code and additional advice to landlords, leaseholders and agents. Approved by the Secretary of State at DLUHC, and updated periodically, this helps set standards, uniformity and transparency in the setting of charges – helping support best practice for leaseholders, freeholders and those involved in the setting and collection of ground rents and service charges.

Option 1: Capping ground rent at a peppercorn

The capping of ground rents at a peppercorn is the option that probably the closest option to supporting the long-term ambition of the Secretary of State - of empowering leaseholders and protecting them from future onerous ground rents. It would align existing ground rents to that of new properties that are already in place and is seen by many as the option that probably best serves leaseholders.

However, many freeholders and investors have expressed a concern to RICS about this approach. There is a risk some freeholders may voluntarily or involuntarily leave the sector – opening a range of legal and administrative challenges for the government, or potentially shifting management to another freeholder or resident management company. 

Option 2: Capping ground rent at an absolute maximum value

While this may appear a simplistic option, it does create a scenario where ground rents could still rise for leaseholders currently under the maximum value – which would fail to align it with the government’s overall ambition for the reforms.

Like Options 3 to 5, this also presents the challenge that leaseholders could be required to pay the ground rent charge which little knowledge or transparency for what service they will receive in return.

Option 3: Capping ground rents at a percentage of the property value

Unlike Option 2, which risks lower-value ground rents increasing in comparison to rents already at the threshold, Option 3 will create parity for leaseholders across the system. Depending on what the percentage threshold will be capped at, some leaseholders may see their ground rent increase, while others may fall below what the ultimate amount is.

Freeholders and investors have told RICS how this option will at least provide them with the assurance that the current value of the property is reflected within the ground rent setting, limiting the potential financial risks of the reforms. With the government asking respondents to explore what the percentage option should be, ranging from below 0.1% to above 0.3% of the value, several agents overseeing ground rents told RICS that based on current valuations and ground rent charges of their portfolio, some leaseholders could see a sudden increase in their ground rents – again, not aligning with the government's overall ambition of protecting leaseholders.

This option also presents challenges around setting the valuation – with many freeholders (and to a lesser extent leaseholders) requesting updated valuations of their blocks. For Registered Valuers, this could create a sudden influx of valuation requests within a short-time frame, which is why RICS has offered to work with DLUHC should this option be selected.

Option 4: Capping ground rent at the original amount it was when the lease was granted

Using the original amount when the lease was granted is probably the option that runs the risk of the greatest disparity for leaseholders and in RICS discussions with the sector on these reforms, is perhaps the option that generated the most agreement that it is an unsuitable choice.

For freeholders, linking the original amount to a form of RPI and then setting the amount would give them more assurance around the financial stability of future ground rents, but like other options, there is still the risk that leaseholders could see their ultimate ground rent increase as adjustments are made to reflect RPI.

Option 5: Freezing ground rent at current levels

Perhaps the simplest option to implement as it is based on the status quo, but it also means leaseholders who have seen significant rises in recent years will see that figure set in legislation. Depending on the implementation window, it also risks a future rise coming in ahead of the compliance date – RICS has called on the government to communicate urgently when the date of ground rent level should be set. 

RICS will continue to work with members and stakeholders across the various aspects of the government’s leasehold reform programme. We value the contribution that members and stakeholders have made to this consultation. If you would be like to be involved in the work that we are doing on leasehold reform please contact knowledge@rics.org.