A few weeks ago, the government revealed an industry pledge that commits signatories to doing away with onerous ground-rent clauses within leasehold agreements. Among those who have signed up to the pledge are housebuilders Taylor Wimpey and Barratt Homes.
The government has been under pressure over the past few years to tackle the problem of unfair leasehold agreements. Generally, leasehold ownership is used in blocks of flats owned by one freeholder, in order to allow for the centralised upkeep of communal areas, financed by service charges paid by each leaseholder. Ground rent is part of the contractual agreement between the leaseholder and freeholder, but no services are provided in return, and it is often set at zero.
Problems emerged when developers began selling
new-build houses on a leasehold basis. This was unusual, because generally houses don’t require communal upkeep. These agreements often included doubling ground-rent clauses and charging for alterations such as new windows.
When leasehold homeowners tried to buy the freehold, they often found it had been sold on to a professional investor, and marked up. These factors can combine to make it difficult to find a buyer for the property.
After a major furore, the government promised to crack down on these arrangements. Although it has previously said it would like to ban the sale of new-build houses on a leasehold basis and cap ground rents at peppercorn rates, no legislation has been passed to enforce this. The pledge instead places public pressure on housebuilders and freeholders to make the situation better for homeowners, but that’s all.
Among other measures, the signatories have agreed to identify leases where ground rent doubles more frequently than once every 20 years, contact the affected leaseholders and offer to change the arrangement to one linked to the retail price index (RPI); and to ensure the process for leaseholds to buy the freehold or extend their lease is “uncomplicated, transparent and fair”. Although this pledge is not binding, given how high-profile and sensitive the issue is we wouldn’t be surprised if the government does eventually put in place statutory restrictions.
What about investors?
If you have invested in a ground-rent income fund (which invests by buying freeholds from developers to benefit from the reliable income provided by ground rents), this doesn’t mean your investment is now worthless.
However, you might have to come to terms with a lower level of income in the future. The Ground Rents Income Fund (LSE: GRIO), for example, has offered all its residential leaseholders with doubling ground rents the chance to convert their existing rent-review mechanism to one that increases according to the lower of RPI or doubling.