Following a couple of consultations the government has published its report on leasehold reform which is indicative of the flavour of the legislation due to be enacted soon, though understandably the current health crisis my delay this indefinitely.
One of the main options suggested in the report is the adoption of the percentage rule, that is ground rents must not exceed 0.2% of property value, or 0.1% for new build properties. Doubling ground rents would be acceptable provided they do not double more frequently than every 20 years and this does not continue to double beyond 125 years. Fixed increase ground rents would not be allowed to exceed more than double.
However, writing for Mortgage Finance Gazette, Geraint Evans, director at Bureau Property Consultants says that adoption of this rule would result in “the resurrection of the mortgage prisoner,” harking back to the credit cunch of 2008.
“The adoption of the 0.1% ground rent rule by lenders for leasehold properties could pave the way for a new class of mortgage prisoner, trapped in a home they cannot sell or remortgage, says Mr Evans.
“Pointing to the discontinuity caused by the continuous change in housing minister’s (we are now on the 10th minister in 10 years) Mrn Evans thinks it’s no “wonder certain proposals are having an unruly impact on consumers and the market.” he states.
For a long time now, more and more developers have been incorporating increasingly higher ground rent payments into their leases when they sold new build flats and houses, often to unsuspecting first-time buyers who now find themselves trapped in homes they cannot sell.
Ground rent payments were subject to frequent reviews and increases, often doubling or linked to inflation, so whilst this was very attractive to long-term ground rent investors, leasehold homes became more difficult to sell or finance.
In addition, buyers then found that high service charges, one-off and unexpected bills, permission charges and high enfranchisement or lease extension charges where not unusual. This and the uncertainty surrounding the pending reforms brought caution and uncertainty surrounding both property leasehold and ground-rent sale valuations.
It now looks like the government’s intentions surrounding the future of ground rents and leasehold reform are becoming clearer. The Law Commission review and a House of Commons Select Committee has clarified the position somewhat on the potential legislative changes. This would include plans to ban future leases on new build houses, a legal clamp down on unjustified costs, provide rights for leaseholders to challenge payments and implement regulation to review charges faced by leaseholders and freeholders.
The government has said it plans to create a compulsory new homes property ombudsman service which will include a code of practice to deal with leaseholds, service charges and mixed tenure estates.
Its not clear whether the legislation will include existing leases retrospectively, especially those with “onerous ground rents,” though currently this is said to be unlikely.
Many lenders currently have a ground rent lending policy for individual flats, which Mr Evans’ warning is addressing. Nationwide is one of the toughest lenders is this market, stating they will not lend where the ground rent is more than 0.1% of the value.
The Law Commission’s report aims to simplify the way in which premiums are calculated and reduce these, and is amongst a number of what Mr Evans calls “very sensible conclusions,” but, he says, there are some unworkable suggestions that must be addressed.
“Its specific assertion on ground rents that surpass 0.1% of the freehold value of properties being onerous is extremely problematic for leaseholders trying to sell their homes. Lenders are simply not approving mortgages on such properties because of this onerous label.
“The creation of mortgage prisoners was one of the lesser-known consequences of the 2008 financial crisis. After the crash, regulators and banks scaled back their lending criteria, which meant those trying to get a mortgage would be faced with tougher affordability tests,” Mr Evans states.
“Fast forward to today and the adoption of the 0.1% ground rent rule could pave the way for a new class of mortgage prisoner. The report outlines that it is “widely considered” that any ground rent which exceeds 0.1% is “generally considered onerous”; an assumption that appears to be based entirely on a single factor: that Nationwide Building Society will not lend on new-build properties where the ground rent exceeds this rate.”