Opinion: Why removing ground rents will have a negative impact

24 February 2021 | Investment

Opinion: Why removing ground rents will have a negative impact

The government’s plan to reform leasehold laws has been met with much fanfare. Under the plans, ground rents would be removed, and leases would be extended to a maximum term of 990 years.

This, in theory, would give leaseholders more control over the property they live in. However, the plan should come with a word of caution: by reducing or removing ground rents, leaseholders are exposed to the ravages of fate and bad luck.

Where freeholders in the past would have picked up the initial cost and liability of maintenance and repair work, responsibility now falls to the leaseholders. The impact of this could potentially be catastrophic.

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Under the current terms, freeholders act as guarantors for essential works on freeholds. In practice, that means freeholders often foot the initial bill for essential work or maintenance, organising repayment plans with individual leaseholders to make the costs more manageable. Many freeholders ensure that all of the repayment plans are competitive and often do not charge any interest whatsoever.

Professional freeholders play an important role in enabling first-time buyers to own homes whilst protecting them from major upfront costs.

Under the new scheme, all of this protection goes away; leaseholders must foot the bill themselves. For first-time buyers or those on low incomes, large individual outlays could have severe consequences.

Moreover, under the new rules, a ‘responsible person’ (RP) must be appointed for the entire freehold. This role carries the potential for criminal prosecution if issues arise.

The RP is responsible for ensuring that the building has a valid fire risk assessment and would be liable if issues arose in communal areas.

Clearly, this is a huge responsibility and one that, under the current law, the freeholder would normally take on as part of their role in exchange for charging ground rents.

The question for those welcoming the reform to leaseholder legislation is this: who will take on the role of RP? This question goes to the heart of why professional freeholders are important.

Without an independent non-resident, the management of a freehold becomes very difficult. Of course, there are examples where leaseholder groups have managed it. However, it is clear that this is not a practical solution for all leaseholders. Indeed, while leaseholders move on, a professional freeholder is usually involved with the building for a far longer period of time and therefore takes an interest in its upkeep.

In some circumstances a leaseholder might be happy to take on criminal liability. But what happens when no one steps forward? Must we force leaseholders to draw lots?

Alternatively, what if you find yourself with someone who wishes to become the RP in order to dictate the decision making of a property for their benefit? In this case, neighbours would be pitted against each other and could bring great distress to a community.

There is of course a final point to consider when discussing the proposed reforms. Freeholders employ a myriad of staff, from cleaners to contractors, concierges to maintenance professionals. The removal of the ground rent removes the central fund for these jobs and potentially leaves thousands of people out of work.

So while the new legislation has been welcomed by leaseholders, I urge everyone to consider the small print.

Freeholders absorb a great deal of risk. For certain properties, removing a freehold could be devastating for leaseholders should the worse happen.

*Israel Moskovitz is the founder and CEO of the Avon Group. He has over 30 years’ experience as a developer and property manager.

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This post has originally been featured in Property Investor Today.