Win Some, Lose Some: Viability and Government Ground Rent Intention

03 Jul 19 | Jess Conway

With the government’s intentions clear, these proposals may have far-reaching implications for those involved in residential and/or mixed-use schemes, for both sides of the equation.

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On 28th March 2019 the government announced a crackdown on leasehold deals, following a consultation on “implementing reforms to the leasehold system in England” (October to November 2018). This consultation was the result of an announcement in December 2017 that the government intended to implement a ban on the sale of new leasehold houses and to impose a statutory cap on ground rents for all new leases of residential property granted for terms in excess of 21 years. The Council of Mortgage Lenders has flagged the issue and has highlighted value impact risks of the review mechanisms for leasehold ground rents, something all Iceni clients and friends should be aware of moving forward.

The government view was that, while it is necessary for leaseholders to pay a consideration in the form of a ground rent (because the arrangement is a tenancy), “it is unfair for them to be required to pay economic rents at levels which are solely designed to serve the commercial purposes of the developer and any future investors. Furthermore, leaseholders see no material benefits from these payments.” (Implementing reforms to the leasehold system in England: a consultation, MHCLG, Oct 2018). James Brokenshire, Housing Minister, has stated in June 2019 that Ground rents may well be set at £0.00 rather than the £10.00 nominal sum previously under consideration.
With the government’s intentions clear, these proposals may have far-reaching implications for those involved in residential and/or mixed-use schemes, for both sides of the equation. Existing home owners under onerous ground rent leases may be offered relief by some of the more conscientious developers but there are a significant number who are locked into agreements which have the capacity to cause hardship. The Government has yet to decide what the effect will be on those already caught by ground rents bought by investors who will fight hard to maintain their income, having paid top prices for the investment.

For developers sales rates of new developments may be slightly increased as ground rents become less prevalent although the added cream of the investment value of indexed style ground rents, will no longer be available. This value input previously helped developments achieve the profitability required and sustain planning obligations, including affordable housing reach local affordable housing targets.
There are, of course, suggested exemptions within the consultation document, such as Mixed-Use, Shared Ownership, Community-Led and Retirement Housing, provided the potential buyer has a choice whether to pay a higher sale price at a ground rent of £10 or a lower sale price with a specified economic ground rent.

No-one can doubt that the government has good intentions and that it is in everyone’s interest that buyers are treated fairly and transparently, not least to retain confidence in our domestic residential market. Whilst proposals are ironed out, the impact on potential viability needs to be recognised and well before the potential introduction of changes targeted for mid-2020. Developers should re-assess their scheme viability in light of a potential reduction in Gross Development Value and the effect on land prices and make sure any risk is mitigated.

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