Countryside Properties has joined Taylor Wimpey and Aviva in announcing it will end the doubling of ground rents on new build developments.
Following an investigation by the Competition and Markets Authority, Countryside Properties will make adjustments to leases so that leaseholders will be able keep rents at the same level as when they first bought their home.
This is good news for leaseholders with 10-year doubling rents, or other reviews where Countryside is still the freeholder.
It will be interesting to see whether Michael Gove, in his new role as Secretary of State for Housing, will push forward with the legislative agenda that Robert Jenrick, his predecessor, started.
The momentum behind leasehold reform continues to grow.
In my article penned and published on 28th July 2021 – and later picked up by FPRA in an Autumn update – I did speculate as to whether there would be others that would follow the lead taken by Aviva and Persimmon – [see the full text of this original article below].
Fast forward just eight weeks and another developer has joined the ranks of those prepared to make an adjustment to 10-year doubling rents. This is undoubtedly good news for those leaseholders. As to whether other developers will follow suit, we will have to wait and see.
As I voiced in my July article, I suspect that this is a question of scale and those that have made this gesture are those where this is ‘easier’ for the freeholder to do, because of the number of affected units; I would speculate this represents a smaller proportion of their overall interests or, perhaps, is non-core to their other operations.
It is clear is that the agenda for legislative and cultural reform in leasehold had been set – it now remains to be seen how – and, critically, when, the politicians will follow this through.
We do have a number of moves in that direction (the Commonhold Council) and the promise of a response from government to the Law Commission’s wider proposals for reform, which is to say nothing of the ground rent abolition bill currently making its way through parliament.
Leasehold Reform News indeed.
Article that appeared first in the FPRA Autumn Newsletter – dated 28.7.2021
Mark Chick FPRA Newsletter Article from July 2021– The CMA Investigation
The so-called ‘leasehold scandal’ has become one of the biggest topics of discussion in the leasehold sector. Many leaseholders who have found themselves with ‘time bomb’ or frequently doubling ground rents (those rising at intervals of 5, 10 or 15 years) feel exploited as they have found themselves bound to pay ground rents to their freeholder that will increase in cost at a rate that is faster than normal inflation and in the worst cases end up becoming so significant when compared to the value of their property that the flat becomes worthless.
In other cases, frequent doubling of ground rents (intervals of less than 20 years) will make their property often becomes difficult to sell or re-mortgage.
In recent years, regulatory authorities have begun to take a greater interest in the scandal. In addition to the draft legislation of the Leasehold Reform (Ground Rent) Bill, currently before the UK Parliament and which promises to abolish ground rents for new leases, the Competition and Markets Authority (CMA) launched its own investigation into the leasehold sector in September 2020.
The CMA’s investigation has focused on companies which have acquired or sought to grant leases where ground rents double at intervals of less than 20 years and, in the case of leasehold houses, where misleading or incorrect information may have been given about the likely cost of buying the freehold at a later date.
This is a significant step towards the regulation of the market and, together with the Leasehold Reform (Ground Rent) Bill, shows the Government’s willingness to clamp down on ‘abuses’ in the leasehold sector.
Although the CMA is yet to complete its investigation, leaseholders received a major boost on 23 June 2021, when the CMA received undertakings from Persimmon PLC and Aviva in relation to actions taken concerning ground rents and the sale of freeholds to leasehold houses.
These undertakings are voluntary ‘settlements’ or open commitments, which are likely to prevent further enforcement action. This means that neither company has admitted to breaching the law, but are acting in response to the CMA investigation. The undertakings are open and enforceable promises to take action to ‘correct’ certain behaviours.
As such, although the undertakings themselves do not prevent further investigation or enforcement being undertaken by the CMA, they are likely to have addressed the issues raised by the regulator in its investigation.
These are the first two undertakings published as a result of the investigation, but the CMA is continuing to investigate other firms, including Brigante, Taylor Wimpey, Barratt Homes and Countryside Properties, so we should receive further news on these investigations soon.
The undertakings from Persimmon and Aviva differ from one another, but both make commitments to reimburse leaseholders that have been forced to make ‘unfair’ payments in the past.
The Aviva undertaking applies not only to existing leases within their portfolio where the ground rent doubles at intervals of less than 20 years, but also to those cases where variations have been made already to change these ‘onerous’ ground rent clauses to RPI (Retail Price Index) reviews at the same intervals.
Aviva gives a commitment to change these RPI reviews to the original rent paid under the leases and to fix this for the remainder of the lease term with no variation. In addition, they offer to repay ground rent that has been overpaid, not only by any current owner but also by any former owner in cases where they still own the freehold.
In the case of Persimmon, there is a commitment to allow leaseholders to purchase the freehold of their leasehold house for the sum of £2,000 or any lesser figure that would apply under the 1967 enfranchisement legislation. This will include making repayments to homeowners who have bought their freehold for the difference between the price they paid and the £2,000 threshold.
In addition, Persimmon has agreed to increase the length of time for a buyer to get to an exchange of contracts under its ‘reservation agreements’ to 42 days in the case of leasehold properties, which will allow for proper advice to be taken by the buyer and avoid undue pressure in the sales process.
If you feel that you are entitled to such a repayment, Aviva and Persimmon have said they will contact those affected to reimburse the costs they overpaid and both companies have agreed to publish details of this on their websites.
Leasehold campaigners have praised these moves and suggested that it can now only be a matter of time before other developers and freeholders follow suit. However, I am not sure that other freeholders are likely to want to return ground rents to their original value voluntarily.
In June 2019, around 70 large freeholders (including Aviva) signed a commitment given to Parliament and the Select Committee on Leasehold Reform – the so-called ‘pledge’ – which was an open commitment to convert onerous ground rent clauses to RPI reviews. Following on from this, in many cases freeholders have already made offers to do this and many leaseholders have already varied their leases in this way.
However, the ‘pledge’ does not go as far as the new Aviva commitment, which offers to take away even RPI reviews and to return the ground rent level to the initial level in the lease for the remainder of the lease term. The Aviva offer is also generous in that they are offering to repay ground rent paid over and above the initial ‘base level’ of the initial ground rent in any lease.
I think that it is unlikely that the 70 other signatories of the ‘pledge’ will follow suit with similar voluntary undertakings so soon after their initial commitment. However, with the CMA displaying an appetite to pursue a number of other institutional landlords, other large organisations may feel persuaded to offer a settlement and/or take steps to amend leases in ways similar to Aviva.
It is going to be more difficult for smaller or non-institutional landlords to follow the example of large companies such as Aviva and Persimmon. As such, I would be very surprised if there is any voluntary movement to reimburse ground rents among this group.
It is more probable that we will see action taken against the future sale of leasehold houses. This is, in part, because the Government has already made plain that it wants to see this practice discontinued. Furthermore, one of the key objectives of the Leasehold Reform (Ground Rent) Bill is to remove ground rent for all new leases – and so, a key incentive for freeholders to grant leases of houses will be removed.
Yet, although we can expect to see other developers give similar commitments to deal with freeholds, I personally doubt whether many developers will want to voluntarily fix a price to sell freeholds to leasehold houses as Persimmon has done. As a result, I would expect that any changes in this area are going to require further intervention from the CMA or Parliament.
The Aviva and Persimmon undertakings may also affect the market for freeholds. Aviva’s commitment to seek to make similar amendments to any leases that are brought into their portfolio may begin to set a ‘tone’ for the marker for freeholds where the leases have RPI, or less than 20-year doubling rents.
If this position were to be adopted across the market (which is a big ‘if’ at the moment as the Aviva position is currently ‘unusual’) then these sorts of freehold reversions will be down valued to take account of the fact that the rents are likely to be treated as being fixed for the whole lease term. The key question is then how such potential lease variations will now be ‘priced in.’
For the investor there is the risk that the right to continue to receive a ground rent income of this sort may be prejudiced by the potential risk of a future need to repay. There will be a balancing decision for fund managers as to how to handle this. I anticipate that the overall values of the underlying assets will be written down to reflect this risk and that provision will be made for potential future repayment. It may be that this is already something that is beginning to have an effect.
The Aviva and Persimmon undertakings can only be good news for leaseholders in the short term as companies show an intention to solve the ‘abuses’ of the leasehold scandal. Yet, it may not be such good news for the long-term stable income/bond market favoured by the pensions industry and annuity providers.
If that were to become the industry norm, then one of the most likely indirect effects may well be that the ‘capitalisation rate’ applied to ground rents in enfranchisement calculations will be subject to further decrease, based on market evidence and a change in how a buyer of freeholds will now look at the likely income over time.
If this happens, the cost of compensating for the lost ground rent income will increase, so there may be an indirect increase in enfranchisement costs elsewhere, which could negatively affect leaseholders in the long run.
So, while we wait to see if any other companies will voluntarily follow the commitments given by Aviva and Persimmon, which is undoubtedly good news for leaseholders, there may be some other unintended consequences that may affect other enfranchisement costs over time.