The diversity of ground rents through the ages stands testament to the ingenuity of parties to leases. Thomas Blount, in Tenures of Land and Customs of Manor, records that the tenant of a farm in Langsett was obliged to pay by way of ground rent “a snowball at Midsummer, and a red rose at Christmas”.
And so to today, when ground rents, usually low or nominal in value, form part of the consideration payable for the grant of a long lease, with the bulk of the value lying in the premium payable. Such rents are of little moment for the tenant, but when aggregated across a portfolio amount to a useful income stream and saleable asset for the developer.
The largely unremarked and unremarkable practice of housebuilders granting long leases at a premium with a ground rent continued without difficulty until the early part of this century, when some began to reserve ground rents that would inflate over the term to unsustainable levels. In many cases, the developer’s solicitors would also act for the tenant, with the result that the escalation in its financial burden would not be picked up until it was too late.
Evolution of practice
Following a long process of investigation and then statutory intervention, such practices have largely ceased. In particular, section 3(1) of the Leasehold Reform (Ground Rent) Act 2022 stipulates that “The landlord under a regulated lease must not require the tenant to make a payment of a prohibited rent”, ie anything more than a peppercorn a year (so a red rose is now unlawful, to say nothing of snowballs), and the Act applies to virtually all new leases granted after 30 June 2022. Importantly, the Act is not retrospective, so ground rent provisions in leases before that date appeared safe.
Or are they? On 27 November 2023, the government published the Leasehold and Freehold Reform Bill. Among other things, it makes far-reaching changes to the law of leasehold enfranchisement.
One is that it caps the level of ground rents for the purpose of calculating the term value in the price payable on enfranchisement at 0.1% of the freehold value at the valuation date. But in addition, shortly before the Bill was published, the government published a consultation document – Modern leasehold: restricting ground rents for existing leases – which sets out proposals to cap or eliminate the ground rent that existing residential tenants can be charged.
In the second reading debate, the secretary of state for levelling up, housing and communities said he favoured reducing existing ground rents to a peppercorn in order to “squeeze every possible income stream that freeholders currently use so that, in effect, their capacity to put the squeeze on leaseholders ends”.
Motivation for change
Why this continuing war on ground rents? The government’s main reason appears to be that ground rents are an unmeritorious bung for the freeholder.
As it puts it in its guidance on the 2022 Act, “Long leases… frequently require a leaseholder to pay an annual ground rent, often hundreds of pounds a year, for which the landlord does not have to provide a clear service in return.”
his thinking fundamentally misunderstands the role that consideration has to play in the grant of a lease. Were there no ground rent, the premium would be higher, to the tenant’s detriment – it is as simple as that. We can acknowledge the problem caused by escalating ground rent provisions that outstrip inflation and act as an unexpected financial burden on leaseholders whose properties are rendered unsaleable. But what is wrong with vanilla ground rent provisions which form part of the consideration for the grant of the lease, and without which the premium would have been greater?
What makes the government’s antipathy towards such ground rents even more inexplicable is its recognition that leaseholders under existing leases will reap a windfall if ground rents are abolished as the government proposes.
Thus, in its impact assessment published on 6 December 2023, the department notes that “capping all ground rents will lead to an increase in asset value for all leases”. And who will carry the can for this? The answer boldly announced by the same paper is the freeholders (including pension funds) who “will be significantly impacted by a proposed cap to existing ground rents” – to the tune (in the case of the peppercorn option) of a loss of income of £5.1bn over the next 10 years and a loss of asset value over the residue of the term of £27.3bn, without any compensation.
Good news for leaseholders holding under existing leases with modest ground rents, perhaps subject to inoffensive indexation provisions, who can now look forward to the wholly uncovenanted and unmerited abolition of ground rents that the government proposes and an increase in the value of their interests. Bad news for the pension funds and other owners of ground rent portfolios.
Judicial challenge
But would these proposals be able to resist a challenge under Article 1 of Protocol 1 of the European Convention on Human Rights? Case law has established that the deprivation of property without any compensation is nearly always unlawful, albeit that less than full compensation can be justified on grounds of social policy.
Our Supreme Court has observed (in Salvesen v Riddell [2013] UKSC 22) that “Landlords, however unpopular, are as much entitled to the protection of the Convention rights as anybody else”.
It is difficult to see how the reduction of ground rents to a peppercorn can be justified in that (i) it is unnecessary to enable the government to achieve its declared policy aims of transparency and fairness for leaseholders (a cap or a limit would suffice); (ii) it would be a direct deprivation of the freeholder’s property for which no compensation is to be paid; and (iii) the compensation for the deprivations involved in the other proposed measures is said to be proportionate because the price payable would sufficiently reflect “market value” in that the freeholder would receive the value of its lost rental stream and the present value of its future reversion; but the stripping out of any term value would remove even this fig leaf.
Guy Fetherstonhaugh KC and Jonathan Gaunt KC are barristers at Falcon Chambers
Image © Oliver Dixon/Shutterstock
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