The Leasehold Reform Bill: a misplaced eye on developers

The practice of doubling ground rents and the need for more strident leasehold reform have been the two main drivers behind the government’s Leasehold Reform Bill. Yet, in its current form, the bill does little to rectify the main issues at play. Instead, it puts a misplaced focus on developers and their future actions.

The provision within the current draft of the legislation to remove ground rents from only future leasehold houses is an erroneous restriction. With many large developers having already announced the end of ground rents on their new leasehold houses, it seems rather odd that the government is choosing to focus on new-builds. Energy would be better spent addressing the concerns of existing leaseholders. So, what might be the knock-on effects of this bill on property developers?

Selling houses as leasehold rather than freehold has traditionally given developers two bites of the cherry, as they receive the sale price of the lease and can then have the benefit of collecting the annual ground rent for many years to come. Historically, developers have been split down the middle, with some retaining the freehold to collect these ground rents for many years while others simply sell on the freehold to generate further revenue that can be obtained immediately.

When selling the freehold title, it has often been common practice for some developers to multiply the yearly ground rent by 30 to calculate the cost of the freehold. Others will simply have the freehold valued by a surveyor, but the higher the ground rent the more the freehold is worth. This is why the prevalence of doubling ground rents in recent years, to in some cases exorbitant levels, has resulted in freeholds becoming very expensive to purchase.

While the bill may intend to prevent the market disruption of doubling ground rents from happening in the future, there are more pressing leasehold concerns

However, almost all developers have now ended this practice in order to comply with the consumer code – even if this has only been done as a result of Competition and Markets Authority investigations into these catastrophically spiralling rents. 

Having only moved away from the practice in recent years, this is still a very fresh loss of revenue. Developers that previously first sold properties as leasehold, and then sold the freehold further down the line, are now having to factor in this potentially lost additional revenue when selling new-build homes straight away as freehold properties. With ground rents removed, it can be very difficult for developers to calculate the cost of the freehold, particularly if the land was bought many years before. This has arguably led to developers losing out in some cases.

However, given that no developers now sell new-build leasehold houses, it seems strange that the government is setting the Leasehold Reform Bill’s focus on housebuilders rather than existing leaseholders around the country. I would not go so far as to call the bill an unnecessary attack on developers, but it is certainly a wasted opportunity.

While the bill may intend to prevent the market disruption of doubling ground rents from happening in the future, there are more pressing leasehold concerns. Leaseholders are being financially crippled by escalating ground rents and are often left out in the cold to fend for themselves. For example, when ground rents exceed £1,000 in London or just £250 in the rest of the country, many lenders often require variations to be made to the leases before they proceed with mortgage applications.

The government may have further planned reforms in the pipeline which look to combat these concerns, but given the amount of time that bills can take to progress through parliament, such a strategy seems highly inefficient. It also suggests these issues are unlikely to be addressed any time soon. Moreover, with the Department for Levelling Up, Housing and Communities also tasked with leading the levelling up agenda, it seems highly unlikely that there is enough resource left in the tank to also solve the real leasehold crisis.

It is difficult to say if the bill’s proposed changes will slow down the property development pipeline, but my instinct is that it will not. With most developers having already implemented these ground rent changes for their new leaseholds, a successful Leasehold Reform Bill should not come as such a disruptive shock to their business practice. However, it does seem to be a missed opportunity to provide further support to leaseholders.

Developers are already facing significant pressures, with the cost of building materials rising due to Brexit and covid-19 induced supply shortages and transportation issues. Therefore, at a time when the country needs more new homes than ever, the Leasehold Reform Bill seems to be placing the spotlight in the wrong direction. 

Linda Kirk is a director at Adkirk Law