Ground rent reform – fixing one problem and creating another?

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The draft bill to implement the government’s ground rent changes finally reached the House of Lords in May 2021. This legislation had been long awaited and, largely, the provisions were as expected following the earlier consultations and government announcements and discussions.

Despite the fact that legislation is still only in draft, the living sector is already pivoting in many respects to comply with the legislation. For example, it has now become the norm that all new residential apartment leases are being granted without a ground rent and with the intention that the freeholder of pure residential blocks will be transferred to the residents’ management company.

Back in January 2021, there was a surprise announcement that later living housing would be included within the terms of the legislation and would no longer be an exempt product. This part of the market is being given until April 2023 to change their form of leases, an announcement which took the industry somewhat by surprise and has meant that the standard form of retirement lease used in the past has had to be reviewed and amended to ensure the ongoing financial viability of these types of developments. The decision is one which is rather baffling considering the social care crisis and general acceptance that the UK needs more accommodation for older people, and that obstacles to growth should be removed where they can be.

The lack of a ground rent is, on the face of it, good for residential owners but, from an investment perspective, is an income generation stream that is now missing and needs to be recouped in other ways. This has meant the restructuring of our clients’ standard forms of lease and may give rise to increases in unit costs to cover the missed income generation stream.

Legacy ground rent deals are still being agreed on previously completed apartment blocks, although the changing legislative landscape has had an impact on the price these assets can command as buyers move away from this market.

How the structuring of mixed-use residential and commercial blocks will be impacted by the changes is less clear. Careful thought needs to be given on each and every mixed-use development now in order to ascertain who will be the best long-term owner of the freehold and long leasehold interests in the block, given that there is now no income stream on a yearly basis from the residential apartments. This may mean that mixed-use buildings become more complex from a legal structuring perspective so as to future proof their ongoing maintenance and service charge recovery. These changes, coupled with the changing regulatory landscape post-Grenfell, will put an extra administrative and legal burden on residents’ management companies, who will in turn require more professional help from managing agents to relieve this burden. Is this a case of fixing one problem and creating another? Time will tell.

 

This article appears in our Investing in Living report. To access the full report, please click on the link to the right of this page.

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