The Ministry of Housing, Communities & Local Government is the latest body to call time on ground rents, subjecting all leasehold properties sold under the 2021-23 Help to Buy Scheme to a peppercorn ground rent.
Although there are many that argue that ground rents on new build developments have got out of hand over the past few years, the sell-on value of the reversion to a residential development has been something relied on by developers to maximise the profit of their developments. To learn that the Ministry will require all leasehold properties sold under the 2021-23 Help to Buy Scheme to be subject to a peppercorn ground rent is not going to be happy news for developers participating in the Scheme.
In a press release published on 24 February 2020, the then Housing Secretary, Robert Jenrick, set out a set of requirements for the 2021-23 Help to Buy Scheme, including the restriction of ground rents for leasehold properties to a peppercorn. The press release is titled ‘Housing Secretary clamps down on shoddy housebuilders’, which is perhaps a little unfair in the ground rent context, but reflects the negative light that modern ground rents are seen in.
The industry has been expecting something like this for a while now, although more as part of wide-ranging government reforms of leasehold law some years down the line. That the Ministry has taken it upon itself to do this now and on such short notice when many developers signing up to the Scheme will be starting to forecast for 2021 and beyond, has come as a surprise.
There are already developers who no longer factor in a freehold reversion sale in their development forecasts. However, they are not the norm and in the short term, the impact is going to be felt by leasehold purchasers – if a developer is losing a revenue stream, where is it going to look to make up that loss?
The simple answer (and therefore the most likely), is that prices for leasehold properties will increase to offset the loss. It is widely accepted that Help to Buy has already increased prices at the bottom end of the market and this move by the Ministry, no matter how well-intended it probably is, will compound the issue further.
It also leaves developers with a practical question of what to do with leasehold developments once they have sold the units. A ground rent sale to an investor was a neat way for the developer to exit the development and move on, often closing down its SPV and starting a new development.
With no residual value in the freehold, perhaps the only people left with any interest in taking it off a developer’s hands would be the leaseholders. That may be part of the Ministry’s thinking of course –
to take the value out of freeholds to encourage them to be transferred to tenant management companies.
With a lot of work required by the government to make commonhold a viable way to sell flats, perhaps the Ministry sees this as the next best thing. If the landlord no longer has an interest in the development beyond the flat sales, why not sell them all on 999-year leases and hand management over to the tenants once the last unit is sold?
A problem arises where a development has units that do not qualify for Help to Buy due to the price, or not all units are sold with Help to Buy, despite qualifying. Developers could well start selling some flats with a ground rent and some without, which would leave some residual value in the freehold and could cause an issue for buyers not aware of the differences.
While many will welcome this move by the Ministry, as so often is the case with unilateral action such as this, the absence of binding legislation to bolster it means there will be unexpected consequences. The popularity of the Help to Buy Scheme, both with developers and buyers, will continue unabated despite this change, but it will be several years yet before we can say whether the Ministry acted too hastily in trying to do away with ground rents.