Ground Rents (Leasehold Properties)

Eddie Hughes Excerpts

1st reading: House of Commons
Tuesday 25th June 2019 Commons Chamber

[Eddie Hughes (Walsall North) (Con)]

I beg to move,

That leave be given to bring in a Bill to regulate ground rents charged on leasehold properties; to make provision for a cap on ground rents; to make property developers liable for the legal costs of leaseholders seeking to vary certain ground rent contracts; and for connected purposes.

Mr Speaker, imagine for a moment that you own a lovely one or two-bed apartment with your family, or perhaps even a recently built house. You have lived there quite happily for a few years, but you decide it is time to move, perhaps because of schools, for work or to move up the property ladder. You are primed and ready to go, but the estate agent asks for a copy of your leasehold agreement and there in the small print you get hit with the fact that you cannot sell your property—you are trapped. Tens of thousands of people across the country are in this position, and it simply cannot be right. This leasehold ground rent scandal needs attention right now. In many cases, developers have created leases with feudal ground rent clauses that have since fallen out of favour with lenders, leaving owners stuck with an unsaleable property because prospective buyers cannot get a mortgage to purchase the property.

In some cases, the ground rent doubles every 10 years. In others, it doubles just once. There are reports of lenders refusing to lend on what they deem as unreasonable or onerous ground rent clauses. Some will not lend if the ground rent exceeds 0.1% of the property value at any point during the lease. Leasehold campaigners argue that there are close to 100,000 people affected by terms that leave them with a ground rent in excess of 0.1% of the property value. I would argue that such circumstances are onerous. The result is an unsaleable property and, in many cases, the developer is long gone, having sold the freehold on to a distant investment company. They have, of course, made their money twice—not only from selling the leaseholds in the first place but from selling on the freehold.

Ground rents can, of course, be peppercorn or set at a reasonable rate, and the Ministry of Housing, Communities and Local Government report shows that the market place is mixed, but it is important to clarify that ground rents have nothing to do with the maintenance of a building. They are simply an income for the freeholder. As the Under-Secretary of State for Housing, Communities and Local Government, my hon. Friend the Member for South Derbyshire (Mrs Wheeler), who has responsibility for housing and homelessness, told the MHCLG Select Committee:

“One of the things I do find utterly fascinating is that a building might be beautifully maintained at a peppercorn ground rent or poorly maintained at £500 ground rent. The amount of ground rent payable is no indication of the quality of the maintenance and services provided.”

There is nothing wrong with a freeholder taking a reasonable ground rent, but when that ground rent becomes onerous and stops someone selling their home it becomes a problem. The rights between freeholder and leaseholder need to be redressed.

As the Select Committee commented:

“Any ground rent is onerous if it becomes disproportionate to the value of a home, such that it materially affects a leaseholder’s ability to sell their property or obtain a mortgage. In practical terms, it is increasingly clear that a ground rent in excess of 0.1% of the value of a property or £250—including rents likely to reach this level in future due to doubling, or other, ground rent review mechanisms—is beginning to affect the saleability and mortgage-ability of leasehold properties.”

My Bill seeks to address this.

The result of developers selling on the freehold to investors is that some freeholders are remote and uninterested in helping their leaseholders. Those who are interested charge unfair fees and legal costs for what should be a simple solution. I know of one such scenario in which there is a £180 charge just to discuss terms with the freeholder.

The freeholder could of course just ignore the problem, or say no. There is currently no obligation on the freeholder to help to sort the problem out—except good will. It cannot be right that in 2019 we have leasehold properties unable to be sold because of ground rent clauses. Behind each problem is a person, an individual, a family, a couple or perhaps a small investor. They do not deserve to be forgotten and left high and dry, trapped indefinitely with their property.

What can be done? Currently, the law allows 50% of leaseholders in a block of apartments to get together to buy the freehold—quite a task, and a long and expensive process if you just want to sell your property. Leaseholders could try to extend the lease, but again there is an elongated process, with expenses running into thousands of pounds. There is also the possibility that the leaseholder negotiates a variation of lease with the freeholder. This is also costly, and there is no onus on the freeholder to do the deal. It is probably the simplest solution, but with prohibitive expenses and no obligation on freeholders to engage, we have a postcode lottery of failure and success.

The Select Committee noted:

“The options for leaseholders with onerous ground rents are limited. House owners are entitled to pay to enfranchise after two years of ownership, thus removing any obligation to pay ground rent, onerous or otherwise. However, this would only be possible if the cost of enfranchisement…is both reasonable and affordable for the house owner. Flat owners, similarly, are entitled to enfranchise, although this is a much more difficult process, requiring the consent of 50% of the owners in a residential block… Otherwise, leaseholders are reliant upon the benevolence of their freeholder to remove unreasonable terms.”

That is why I am proposing this private Member’s Bill.

I am aware that the Law Commission is currently contemplating a solution to the thorny issue of onerous ground rents on existing leases, but I propose simple solutions. First, we need to create a legal obligation on freeholders to grant a quick and simple lease variation to leaseholders where ground rent prohibits a sale. Secondly, it is important that ground rents are capped at the lower of £250 per annum or 0.1% of the property value.

I am also considering including an obligation on the original developer to foot the leaseholder’s legal bills in such situations. After all, why should families have to find a large sum to solve a problem not of their making? If the Bill progresses, I hope we will be able to shape it more specifically in Committee—I imagine that might be somewhat optimistic.

Systems and institutions are supposed to serve the public, and I hope we can all agree that we cannot have people unable to sell their property. Drastic and immediate action is required. I believe there is growing concern on both sides of the House about leasehold properties, and the Select Committee should be commended for its excellent report. I am also pleased to see that the Competition and Markets Authority has taken this issue on board and is looking at mis-selling in this arena. I hope both the Government and the Select Committee will keep this under further review.

I believe there is a wide cross-party consensus in Parliament on this issue, and the time for Parliament to intervene on the leasehold ground rent scandal is now. I hope hon. Members will help me to change the law to restore fairness in this sector and to stop people being trapped in unsaleable properties.

Question put and agreed to.

Ordered,

That Eddie Hughes, Kevin Hollinrake, Mr Edward Vaizey, Bob Blackman, Teresa Pearce, Andrew Lewer, Matt Western, Siobhain McDonagh, Mary Robinson, Mohammad Yasin, Mr Tanmanjeet Singh Dhesi and Neil O’Brien present the Bill.

Eddie Hughes accordingly presented the Bill.

Bill read the First time; to be read a Second time tomorrow, and to be printed (Bill 409).