79.The campaign for reform of the leasehold sector has gained prominence in recent years with the revelation that some developers had imposed onerous ground rent terms in the leases of newbuild flats and houses, leaving many leaseholders with ground rents that would rise well beyond the rate of inflation, and sometimes unable to sell their properties or re-mortgage. In addition, many modern leases contain high permission, or consent, fees: charges levied by the freeholder for the right to, for example, alter a property, re-mortgage, keep a pet, or even change a doorbell. This chapter explores the evidence we have received regarding these terms and proposes that they be prohibited from future leases and remedied in existing leases.
80.Ground rent is whatever a leaseholder must give to the landlord periodically in return for receiving the exclusive right to occupy land. It is usually money. But rent is not essential to a lease, and can be wholly nominal—often referred to as a “peppercorn”. The Minister for Housing and Homelessness told us that the level of ground rent bore no relation to the quality of maintenance and services provided to the building:
One of the things I do find utterly fascinating is that a building might be beautifully maintained at a peppercorn ground rent or poorly maintained at £500 ground rent. The amount of ground rent payable is no indication of the quality of the maintenance and services provided, and people need to get that into their heads a little bit, please.
As ground rents have nothing to do with the level of maintenance of a building—which is covered by the service charge—it is right to consider what leaseholders do, in fact, receive in return for their ground rent.
81.Freeholders argued that the ground rent provides them with an incentive to participate in the market; to be the “custodian of the building or estate” who provides the “very long-term view on the decisions affecting the building and grounds”. A monetary ground rent, Long Harbour told us, provided an “economic incentive for us to invest in the various teams of professionals who work in our business, undertaking the stewardship role” and “police the managing agents”. As outlined in the first chapter, others questioned whether freeholders provided a significantly higher level of service than that which could be provided by leaseholders themselves.
82.Developers told us that ground rents helped to reduce the initial price paid for a property, with leasehold houses being sold for less—typically, 20 times the annual ground rent—than for equivalent freehold properties. Representatives of Persimmon and Taylor Wimpey reported that, as they ended the practice of selling leasehold houses, they increased the price of the remaining, now-freehold units. We received several written submissions which contested this point, reporting that freehold properties on their estate had been sold at the same price that they had paid for a leasehold property. For example, Mr Ashley Bishop, a Persimmon customer, told us, “I realised that people living on the estate, who moved in the same day as myself were in fact freeholders of their houses. The same houses, for the same price, but freehold.” Sir Peter Bottomley MP, co-Chair of the APPG on Leasehold and Commonhold Reform, said ground rents did not reduce property prices:
A second major problem is when people start realising that ground rents have no purpose whatsoever [ … ] The answer is nothing [ … ] Homes are sold at market price. Those who have persuaded or hope to persuade Government or this Committee that having a ground rent reduces the price to the people they are supplying the home to are wrong, and they know they are wrong. I hope at some stage, perhaps as a result of this inquiry, they will be told that.
83.The Minister was right to say that ground rent bears no relation to the level of maintenance or quality of service provided to leaseholders—indeed, that is the function of the service charge. Many buildings are well managed without any ground rent being paid. While monetary ground rents may provide an economic incentive for professional freeholders to participate in the market, we have already concluded that—other than in complex, mixed-use developments and retirement properties—most do not provide a significantly higher level of service than that which could be provided by leaseholders themselves. While developers told us that leasehold houses are routinely sold at a lower price than their freehold equivalents, it is concerning that several leaseholders provided evidence that this was not a consistent policy.
84.We received a considerable number of written submissions from leaseholders who told us they had onerous ground rent terms. However, there is no agreement about what constitutes an onerous ground rent, and this has led to disagreement as to the scale of the problem. The Government told us that “what one person considers onerous may be acceptable to another.” David Jenkinson, representing Persimmon, expressed his view that an onerous ground rent was one “that materially affects the customer’s ability to sell or dispose of their home”, while Jason Honeyman, from Bellway, told us it was where “a ground rent value becomes disproportionate to the value of a home.”
85.Matthew Jupp from UK Finance, which represents mortgage lenders, noted that the UK Finance Lenders’ Handbook did not define onerous, but required ground rents “to be predictable, to be understood as to what the level is going to be, to be set out quite clearly, and to allow that to increase periodically by a reasonable amount”, but that this would be for individual lenders to determine. He noted, however, that there were some similarities between what lenders say is ‘reasonable’, with some using a percentage of the property value, and others a particular figure up to £250.
86.Most developers and freeholders agreed that ground rents which doubled more frequently than every 20 years should be considered onerous. Bellway, Long Harbour and Wallace Partnership Group told us this, while Taylor Wimpey apologised to their customers for the “unintended consequences” of imposing such terms, which were “not consistent with our high standards of customer service.” Some highlighted that doubling ground rents should only be considered onerous in certain circumstances, including David Jenkinson, who noted that “if you are doubling £2, for example, it would only be £4… What is more important is the starting amount, where it ends up and whether it is capped”, a point also made by the Minister for Housing and Homelessness, who said, “Equally, with all of these things, it really does depend on where you start. If your ground rent is £250 and it doubles, that is a lot of money. If your ground rent is £25, that is slightly more doable.”
87.Others, however, flatly denied that doubling ground rents were inherently onerous. The Chief Executive of Redrow, John Tutte, told us that his company had sold 347 properties with 10-year doubling ground rents. These had an average starting ground rent of £400 per annum, which would rise to £12,800 in its fiftieth year and remain at that level for the remainder of the lease. Mr Tutte told us he considered these ground rents to be proportionate to the value of the properties concerned and had only ever received one complaint from a customer experiencing difficulty selling their property as a result of a doubling ground rent clause:
As the terms of Redrow’s 10-year doubling ground rent leases were capped, and the properties are in expensive areas of London (typical prices were well over £600,000), it is considered that the ground rent will remain proportionate to the likely value of the properties in 50 years’ time, assuming values increase in line with normal house price inflation; as a result we do not consider it necessary to seek to change these limited number of leases.
88.Many groups, particularly representatives of leaseholders, told us that any ground rent that rose above 0.1% of the value of a property should be considered onerous. This definition was based on a growing trend by mortgage lenders—notably Nationwide, but reportedly also Santander, Barclays and others—to restrict lending on properties with a ground rent over 0.1% of the property value. It was reported that four of the top 20 lenders will not lend if the ground rent is more than 0.1% of the property value. The 0.1% definition was supported by Anthony Essien, Chief Executive of the Leasehold Advisory Service (LEASE), who said:
I would say an onerous ground rent would be anything above 0.1%, perhaps, of the value of the property [ … ] If that is also attached to a regular review of ground rent—let us say every five or 10 years, or for shorter periods of time—it is going to become particularly onerous.
89.We also heard strong objections to the notion that 0.1% was necessarily onerous. Richard Silva, Executive Director at Long Harbour, argued that it was “an incredibly dangerous assertion”:
It appears that you have unilaterally defined an onerous ground rent as one which exceeds 0.1% of the property value… Does this mean that a property worth £190,000 and has a ground rent of £200 per annum it to be defined as onerous? This is an incredibly dangerous assertion to make in the context of a functioning leasehold market of 4.3 million properties. This definition does not correlate with our experience of dealing with thousands of property transfers every year and it is at odds with current lending guidelines… We would strongly urge you to reconsider the way you have defined onerous to prevent damaging existing leasehold values across the country.
90.A further definition of an onerous ground rent refers to the fact that, where ground rents exceed £250 per year or £1,000 per year in London, a leaseholder is classed as an assured tenant. Under the Housing Act 1988, this means leaseholders could be subject to a mandatory possession order for even small sums of arrears. The Government has noted that this is “disproportionate and unfair” and has committed to bring forward provisions to ensure that leaseholders are not subject to these provisions in future leasehold legislation.
91.Any ground rent is onerous if it becomes disproportionate to the value of a home, such that it materially affects a leaseholder’s ability to sell their property or obtain a mortgage. In practical terms, it is increasingly clear that a ground rent in excess of 0.1% of the value of a property or £250—including rents likely to reach this level in future due to doubling, or other, ground rent review mechanisms—is beginning to affect the saleability and mortgage-ability of leasehold properties.
92.The lack of any consensus about what constitutes an onerous ground rent has led to disagreement as to the scale of the problem. Leasehold campaigners argue that there are close to 100,000 people affected by terms that leave them with a ground rent in excess of 0.1% of the property value. We note that, when the Secretary of State wrote to the CMA in November 2018, he too cited this 100,000 estimate, warning that these leaseholders “cannot sell and cannot move”. He also highlighted that “most major lenders… refuse to award mortgages where the ground rent exceeds 0.1% of the property value or where such onerous clauses exist”. It is difficult to make such an estimate, however, given the reluctance of some developers and freeholders to provide figures, as we found out in correspondence. However, we were grateful to Redrow for providing us with an estimate of the number of their properties with a ground rent in excess of 0.1% of the property value (fewer than 15% of 5,000 leasehold properties built in the last five years), which made it all the more disappointing that the other developers we wrote to were unable to do so.
93.Developers and freeholders argued that the numbers affected were actually far lower, based on the more restrictive definition of doubling ground rents. Persimmon and Bellway consequently told us they did not have any onerous leases. Long Harbour undertook research alongside specialist property law firm Winckworth Sherwood LLP and found that there were just 12,000 properties with either a 10- or 15-year doubling ground rent clause. The Government does not have its own data for the numbers of properties affected by onerous terms—noting that leases are private contracts of which there is no public record—and relied on data provided by third parties, including developers, the freehold sector and campaign groups. The Minister for Housing and Homelessness told us that either figure—100,000 or 12,000—demonstrated that only a small proportion of the sector was affected:
Not that I want to use the figure of 100,000, but 100,000 out of 4 million does put it in perspective, and 12,000 out of 4 million really puts it in perspective.
94.Proportionality is, perhaps, better defined in terms of the effect on those leaseholders with onerous ground rent terms. We heard from hundreds of leaseholders who considered themselves to have onerous ground rents, be those doubling ground rents or those that had simply risen above an affordable level. We heard of leaseholders unable to sell their properties, having difficulties re-mortgaging, feeling that they had been mis-sold properties—as outlined in the second chapter—and telling us of the impact this has had on their health and wellbeing. This is a very small selection of the hundreds of stories leaseholders told us:
I purchased [my house] for £106,000 in 2015. The initial annual ground rent was £240, it doubles every 10 years so recently increased to £480. Today I think I’d be lucky to sell for £80,000 if I could find a buyer [ … ] this now leaves me in a negative equity situation with no prospect of ever being able to move—Anonymous
I was not told until I had signed contracts by Bannister Preston of the doubling ground rent [ … ] I am 62 years old and live alone. In time I will need to sell this property and move into something more suitable for my needs. As things stand, I will not be able to sell and recoup my investment in order to fund my retirement. I worry a lot about the future as I have no family at all and I am completely on my own. I do not know what I will do when I can no longer live in this house—Mrs Kathryn Jones
I was aware that the apartment was leasehold and that there was a charge of £300 per annum doubling every ten years [ … ]Last year, in Spring 2017 I decided to put the apartment on the market [ … ] At the very last minute the purchaser sadly had to pull out because she was unable to get a mortgage. She had approached three different providers and each surveyor had given the apartment a zero value. Needless to say both she and I were extremely upset and disappointed [ … ]as I’m sure you can imagine I have suffered with extreme anxiety due to the worry of this and have had to seek medical help. The worry of not knowing whether my apartment is worth anything and the worry of if I will ever be able to sell it and pay off my mortgage is becoming unbearable—Ms Lindsay Moores
95.It is unacceptable that some leading developers have in the past sought to use their market dominance to exploit their customers through the imposition of terms leading to disproportionate ground rents. There is no excuse for such onerous terms, which are symptomatic of the imbalance of power in the leasehold market and are causing considerable distress to affected leaseholders.
96.We were disappointed that, despite making two written requests for information, some developers were not willing to provide us with clear information as to the numbers of leasehold houses and flats that they had sold with ground rents exceeding 0.1% of the value of the properties. We are sceptical that the industry does not readily have access to data on the houses they sold and the ground rents they set. There needs to be greater transparency from the industry and we call on them again to publish this information, to help clarify the true scale of the issue.
97.Opportunities for leaseholders to remedy onerous ground rents through their own endeavour are limited. The principal option would be for leaseholders to enfranchise, removing the ground rent altogether—although not necessarily the permission fees, as we will explore later—or extend their leases, in which case the ground rent would reduce to a peppercorn. However, as noted by Professor Nick Hopkins, those with the most onerous ground rents are likely to find it hardest to enfranchise:
Enfranchisement enables you to extend your lease or buy your freehold. If you are extending your lease, your ground rent goes to a peppercorn. If you have a lease with an onerous ground rent, enfranchisement can help you to buy out that ground rent, but you are placed in a double difficulty. The mere fact your ground rent is onerous means that the cost of enfranchisement is going to be more, because the ground rent is one of the things taken into account in calculating how much you have to pay to enfranchise.
While enfranchisement may be relatively simple, if not inexpensive, for house lessees, it is far harder for those in flats. Collective enfranchisement rules require that at least 50% of the flat owners in the building participate in order to force the freeholder to sell, and the legal process is complex.
98.The options for leaseholders with onerous ground rents are limited. House owners are entitled to pay to enfranchise after two years of ownership, thus removing any obligation to pay ground rent, onerous or otherwise. However, this would only be possible if the cost of enfranchisement—which we call to be made “substantially cheaper” later in this report—is both reasonable and affordable for the house owner. Flat owners, similarly, are entitled to enfranchise, although this is a much more difficult process, requiring the consent of 50% of the owners in a residential block of flats. Otherwise, leaseholders are reliant upon the benevolence of their freeholder to remove unreasonable terms.
99.Some developers and freeholders have introduced remediation schemes for existing leaseholders, offering them the opportunity to convert leases with doubling ground rents to ones where the ground rent instead increases by the Retail Prices Index (RPI). The Government has said that it wants to see this kind of support extended to all those with onerous ground rents, including second hand buyers, and for customers to be actively contacted by developers to be given offers. However, others have suggested that such schemes are insufficient, with Jo Darbyshire, representing the National Leasehold Campaign, telling us that, “They are as little as they think they can possibly get away with.”
100.One of the most high-profile voluntary conversion schemes was implemented by Taylor Wimpey in April 2017, to allow customers with doubling ground rents to convert to a lease based on RPI ground rent reviews at 10-year intervals. Jennie Daly, Group Operations Director, explained that £130 million had been set aside to compensate freeholders where leases had been sold on. Ms Daly accepted that progress had been slow, but noted that the first agreements with freeholders had been completed in September 2018 and the scheme was gaining momentum. However, Leasehold Knowledge Partnership told us that they remained “deeply concerned” about the Taylor Wimpey offer, with Martin Boyd explaining that the conversion offer was only made to original buyers—as opposed to those who purchased these properties second hand—and the numbers of leaseholders who had accepted a conversion was very small. In subsequent correspondence, Jennie Daly informed us that, as at December 2018, 2,495 leases had already been varied, a further 2,000 had been validated as requiring variation and would be amended in due course, and £35 million of the available £130 million had been utilised, with an additional £29 million registered in the system.
101.Which? reported that many leaseholders were unsure whether to accept conversion offers from developers and freeholders, knowing that the Government was looking at the issue of reform of the sector and may propose alternative arrangements. Several leaseholders also told us that they were unsure whether to take the offers made to convert to RPI, particularly given that the revised contracts would see ground rents rise throughout the term of the lease, whereas the doubling ground rents tended to be capped after 50 years. Jo Darbyshire told us:
I consider myself to be a fairly bright person, but I really do not know whether I should take this offer. It is so difficult to know, on a number of fronts. My doubling stops after 50 years. If I convert to RPI, it continues for the whole term of the lease. In my lifetime in the property, I may pay less ground rent but, if I do not enfranchise, the person who has the house after me and after them will pay considerably more than if it had stayed doubling. In theory, the cost to enfranchise, if I convert to RPI, is less than if I enfranchise on a doubler, but that all depends on the capitalisation rates that the valuers use to value it [ … ] Do I play the odds? If I do, because I bought from Taylor Wimpey, in addition to my deed of variation, I have to sign a settlement agreement, which waives all my rights to claim further from Taylor Wimpey [ … ] It is a clever exercise in capping their corporate liability. I really, genuinely do not know what to do.
102.A number of leaseholders told us that converting to an RPI-based mechanism would continue to leave them with an onerous ground rent. Indeed, as outlined earlier, most definitions of an onerous ground rent tend to focus on the saleability or mortgage-ability of a property—the mechanism by which it increases is often less important. Developers and freeholders were clear that RPI was a legitimate mechanism for increasing ground rents, and much better than the doubling terms in some existing contracts. Jennie Daly (Taylor Wimpey) told us that RPI was used “merely to reflect the progressive value of money”, while Jason Honeyman (Bellway) said the purpose was to ensure “the value at the point of sale is in real terms the same value in 25 years’ time.” Richard Silva (Long Harbour) also noted that RPI mechanisms would considerably reduce enfranchisement costs, when compared to doubling ground rents. Further, Matthew Jupp (UK Finance) told us that RPI was acceptable to most lenders, notwithstanding those lenders who would restrict lending on properties where the ground rent is more than 0.1% of the property value.
103.However, Which? noted that, while an offer to convert from a doubling ground rent to RPI offered short-term respite, not enough was known about how a move to RPI might affect homeowners in future. Some leaseholders questioned why RPI had been chosen for these conversion schemes, noting that the Governor of the Bank of England, Mark Carney, had recently described RPI as an inflation measure with “known errors”, which had “no merit”, and should no longer be used in government contracts. Jo Darbyshire noted that house prices did not increase in line with RPI and, therefore, “You are going to get houses and flats where, potentially, the ground rent goes above and below this 0.1% threshold as property values rise and fall and the ground rent rises and falls”, arguing that this was not sustainable in the long term.
104.It is clear that some developers and freeholders have not implemented voluntary conversion schemes at all. Jim Fitzpatrick MP, representing the APPG on Leasehold and Commonhold Reform, highlighted that, despite the initial optimism around the Taylor Wimpey scheme, “the knock-on just has not happened.” We heard that some freeholders were willing to amend leases, but only in return for high fees. One anonymous leaseholder reported being offered new leasehold terms in exchange for £22,000:
The initial annual ground rent was £240, it doubles every 10 years so recently increased to £480 [ … ] The freeholder has offered me some terms that I am not happy with. For £22,000 they are prepared to reduce the ground rent to £200 per annum subject to increases in line with RPI every 10 years. They will extend the lease term back to 125 years. I had to apply for the terms via a company called Homeground Management Ltd and they charged me £108 for this.
105.Noting the reluctance of some freeholders and developers to voluntarily amend leases with onerous terms, the Minister of Housing and Homelessness told us that she would be “eyeballing” them:
When you have an existing contract, I cannot unilaterally change that contract. I cannot do it, but what I can do is encourage a much better voluntary agreement and encourage a much better take-up from that voluntary agreement. Equally, I have heard directly issues over permission fees to have a dog and permission fees to change the carpet; that is absolutely ridiculous. We will be eyeballing the freeholders to say, “This is just not acceptable.”
106.We are not convinced of the merits of the voluntary developer- and freeholder-led schemes that offer to convert leases with doubling ground rents to RPI-based review mechanisms, which have been supported by the Government. RPI-reviews may still see ground rents rise above 0.1% of a property’s value, which many lenders consider to be onerous. Most require RPI reviews across the entire length of the lease, as opposed to a defined initial period, while others demand high fees in exchange for removing onerous terms. These offers are not good value when compared to the Government’s proposed cap for ground rents on new leasehold properties. It is unacceptable that many freeholders and developers are not even offering this bare minimum. The Government’s threat to “eyeball” freeholders and developers is simply not good enough; leaseholders need stronger action from central Government—as we call for in this report.
107.Stronger action might include legislation to amend onerous terms in existing leases. This was supported by Anthony Essien, the Chief Executive of LEASE, who told us that, “If the developers and owners of these onerous ground rents do not intervene [ … ] the Government should intervene.” Others were strongly opposed to Government intervention, with Taylor Wimpey arguing that, “due regard should be given to ensuring that future looking legislation is not applied retrospectively.”
108.Leading housing lawyers told us that human rights legislation would make it difficult to amend leases that had already been signed, but not impossible. Amanda Gourlay told us there were “undoubtedly difficulties with legislating retrospectively”, noting Article 1 Protocol 1 to the European Convention on Human Rights, which relates to the peaceful enjoyment of possessions, and non-deprivation of possessions except in the public interest and in accordance with the law, subject to the right of the state to control use of property in accordance with the “general interest”. Giles Peaker also highlighted this as a challenge, but explained that retrospective legislation would nevertheless be “technically possible”:
Dealing with the situation for past leases could be done legally. It would undoubtedly, I think, face quite a serious article 1, protocol 1 challenge if you scrapped ground rents altogether, and probably, looking at the Strasbourg case law, successfully. That said, the legal mechanics of it are one thing. It is a policy decision in the end, rather than a legal one. It would be technically possible to do it.
109.Under human rights legislation, the right to receive rent is a possession, but a restriction on rent is control of the use of property, rather than expropriation. To be justified, the restriction on rent must be lawful, in the general interest and proportionate. To be lawful, an interference must comply not only with domestic law, but be compatible with the rule of law and not operate arbitrarily. Importantly, human rights legislation does not prevent changes in the law from “properly affect[ing] legal relationships which were established before the changes occurred”.
110.As to the general interest, the courts have ruled that they “will accept the legislature’s judgement as to what is ‘in the public interest’ unless that judgement is ‘manifestly without reasonable foundation’.” To be proportionate, a measure must “strike a ‘fair balance’ between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights”. In this context, the level compensation is an important factor in the determination of proportionality. Full compensation, even for the total deprivation of property, is not always required, although confiscation without reasonable compensation will usually be disproportionate, and confiscation without any compensation will usually require “exceptional circumstances”. The Court of Appeal has said:
[ … ] provided the state could properly take the view that the benefit to the community outweighs the detriment to the individual, a fair balance will be struck, without any requirement to compensate the individual. Should this not be the case, compensation in some appropriate form may serve to redress the balance, so that no breach of Article 1P1 occurs.
111.While retrospective legislation may indeed be technically possible, we heard some objections to such action on points of principle. For example, the Law Society of England and Wales told us that retrospective legislation could undermine the rule of law and adversely affect consumers in the long-term:
It is important to consider the essential public interest in the maintenance of the rule of law. This entails upholding and applying a stable system of rules that govern public interactions and contracts [ … ] For this reason the Law Society would not normally support retrospection with regard to legislation. Knowledge of what the law entails, and confidence that the law will be upheld, is essential to maintain the stability of complex markets such as the property market, in which a number of different actors hold significant interests. Any threat to this stability could have a significant adverse effect on consumers and property owners, which could (depending on what form any retrospective legislation were to take) have an impact on property values, property transactions, housing supply and the wider economy.
They argued that, if the Government were to consider introducing retrospective legislation, it should first conduct a comprehensive impact assessment to examine how any proposals would affect the market, consumers, and other actors including developers, investors, pension funds and estate agents.
112.The Government initially told us they were not able to use legislation to amend existing leases, with the Secretary of State telling us, “the nature of contract law means legislation cannot change the terms of leases that have already been signed.” However, the Minister for Housing and Homelessness later explained that the legal advice was similar to our own interpretation; that retrospective legislation would likely necessitate compensation to freeholders and the Government’s concern was mainly about the cost—which she said would be “horrendously expensive” for over four million leaseholders in England—as opposed to it being impossible to amend existing leases.
113.Were compensation deemed to be necessary, it is right to consider how this might be funded. We note that many of the developers who imposed these onerous leases have made significant profits in recent years, including Persimmon, who paid their former Chief Executive a bonus of £75 million last year and are reportedly due to announce a profit of over £1 billion for 2018, and Taylor Wimpey, who recently announced a pre-tax profit of £810 million. It is also important to note that not all four million leaseholders have onerous terms in their leases—as outlined earlier, higher estimates suggest 100,000 leaseholders are affected, while others put the figure as low as 12,000—and compensation need not be at full value.
114.We note that it would be legally possible for the Government to introduce legislation to remove onerous ground rents in existing leases. While it would be difficult to change the terms of existing leases, it would not be impossible. Retrospective legislation could be compliant with human rights law. We understand that controlling rent would not be confiscation of property but control of its use. Thus, provided not imposed arbitrarily, it is likely Parliament could amend the terms of existing leases ‘lawfully’. Compensation would most likely result in a scheme being compliant with human rights legislation; the impact on society could also justify a scheme.
115.Indeed, the Government proposes to reduce the premium payable to enfranchise, effectively buying freeholders out of a contractual income stream at a discount. There is little economic difference between reducing the statutory discount and reducing the contractual income stream, and this is likely to be equally justifiable in human rights terms.
116.Freeholders would probably need to be compensated in order to ensure the legislation is compliant with human rights law. But that compensation need not necessarily be full value. The Government should undertake a comprehensive study of existing rents to determine the scale of the problem of onerous ground rents and the level of compensation which would be consistent with human rights law.
117.Our view is that, within any retrospective legislation, existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year. They should not increase above £250 over time, by RPI or any other mechanism. While not as low as the Government’s proposed limit on ground rents for future properties, such a cap would reflect that leaseholders entered into a contract expecting to pay a modest ground rent over the course of their tenure and that freeholders have made an investment with a legitimate expectation of receiving some future revenue. Leaseholders should not face any charge, such as administrative and legal costs, or conditions for the variation of their lease to amend the level of ground rent as a consequence of retrospective legislation.
119.In its response to the consultation into Tackling unfair practices in the leasehold market in December 2017, the Government committed to “introduce legislation so that, in the future, ground rents on newly established leases of houses and flats are set at a peppercorn (zero financial value)”. In October 2018, the Government published a further consultation paper, Implementing reforms to the leasehold sector in England, which provided additional details of the Government’s proposals to reduce future ground rents, although not to zero financial value:
Whilst the current practice and interpretation is that a peppercorn rent has nothing more than a notional or nominal value, we are concerned that if we do not make clear what we mean by a nominal sum, it may misinterpreted in the future [ … ] We therefore propose making £10 (ten pounds) per annum a standard cap for future ground rents, whether the leasehold has been purchased through Right to Buy or on the open market.
120.The Minister for Housing and Homelessness told us that £10 should be interpreted as being a ‘peppercorn’, noting that her personal lease “ was peppercorn and 30 years ago it was £25. Who says what “peppercorn” means?” Some legal experts argue that there is nothing especially difficult in law about specifying that future rents for leasehold should be no more than a peppercorn—or be abolished altogether. However, the Minister for Housing and Homelessness explained that a maximum ground rent of £10 had been chosen because “social housing leaseholds are at £10, and [ … ] there would be equity between social housing leaseholders and private leaseholders.”
121.The Government intends that the Housing Act 1980 should set a precedent for a nominal maximum ground rent for future leaseholders. But the decision to set social housing ground rents at £10 in 1980—the equivalent today of around £42—was controversial when introduced. It may be interesting to note that, during the relevant debates in the House of Lords, some peers attempted to persuade the then Government either to index-link the figure, to follow the value of money, or to abandon it in favour of a “peppercorn”. The Government insisted £10 was to represent only a “token” but gave no explanation for favouring £10 over a peppercorn of zero financial value.
122.The Government’s proposal to cap ground rents on new leasehold properties at £10 per year commanded very little support in our evidence. Several witnesses called on the Government to return to its initial proposal to implement a peppercorn of zero monetary value. Guy Fetherstonhaugh QC told us he would “do away with ground rents altogether”, while Giles Peaker expressed his view that “as long as they exist, even at a relatively minor level, it will be a major impediment to the adoption of commonhold.”
123.Sir Peter Bottomley MP, representing the APPG on Leasehold and Commonhold Reform, said there was “no need for a monetary ground rent in leasehold, arguing that the £10 proposal was only to give “some kind of monetary value to the freehold.” He asked, “What is the point of £10 to anybody?”, a point made by a number of witnesses from the property sector, including Dr Nigel Glen (ARMA)—”The £10 is a very strange number, to be quite honest”—and John Dyer (British Property Federation):
[ … ] if you are going to set a ground rent there is no point in having it at £10. The cost of collecting that is more than the £10. You might as well go to a peppercorn [ … ] You either limit it or you do not. I do not see the point in having a £10 cap.
124.Martin Boyd, representing Leasehold Knowledge Partnership, warned that a monetary ground rent had “all sorts of legal implications that are not helpful to the consumer.” For example, we heard concerns that a monetary ground rent could provide grounds for the freeholder to bring forfeiture proceedings for unpaid rent, in a way not be possible with a ground rent of zero financial value. Housing lawyer, Amanda Gourlay, told us that it was possible to bring forfeiture proceedings if you have a ground rent of £10 in arrears for more than three years: “There is a difference. As long as one has a monetary value there is, in law, action that a landlord can take against a leaseholder, providing the ground rent is in arrears for more than three years.”
125.Freeholders opposed the Government’s proposal for the opposite reason; that £10 was too low, disproportionate to the scale of the problem of onerous rents and would drive responsible investors out of the market. Richard Silva, representing Long Harbour, warned the Government that, with a £10 ground rent, freeholders would no longer be able to invest “in the various teams of professionals who work in our business, undertaking the stewardship role”. Instead, professional freeholders would withdraw from the sector, because there would no longer be an economic incentive to participate, which would “potentially open up an opportunity for less professional individuals and/or organisations to buy up these assets.”
126.The Minister for Housing and Homelessness reported that there were freeholders prepared to participate in the market who were not interested in a ground rent, citing Peabody—a housing association in London—as one example. In subsequent correspondence, the Minister reiterated that the Government had heard from freeholders who said they would be interested in managing properties with low ground rents, noting the housebuilder Retirement Security, which had built 1,600 retirement leasehold flats with zero ground rent, and Notting Hill Genesis, a housing association that does not oppose the capping of ground rents at £10. However, freeholders strongly rejected this evidence, with Long Harbour noting that Peabody were a “not-for-profit enterprise and therefore does not represent the professional freehold market”, and to say that freeholders would not be deterred from investing in the sector with a £10 rent, “would categorically not be the case in the professional sector, where the vast majority of leases exist.”
127.We received mixed evidence from representatives of the retirement community. ARCO (Associated Retirement Community Operators) told us that its members did not oppose a ban on ground rents, “as these fees are not essential to ensure the current operation and future growth of the Retirement Community sector.” However, the Retirement Home Builders Group sought an exemption for retirement properties from the Government’s proposed cap on ground rents, arguing that ground rents were used to “help cover the initial costs of construction, including for the significant shared facilities that are an essential ingredient to retirement developments.”
128.Freehold managers, CSJ Residential, told us they wanted to see the introduction of a “reasonable ground rent of, say, £200 per annum”, which, they argued, would “further the involvement of the responsible investor in order to protect the interests of leaseholders.” Freeholders, Consensus Business Group, reported that ground rent and review clauses that may be sufficient to retain institutional investment in the sector would require ground rents at the commencement of the lease to be set at the higher of £250 or 0.15% of the value of the unit, with rent reviews to be conducted at 5- or 10-year intervals by the increase in RPI upwards only.
129.We recommend that the Government should revert to its original plan and require ground rents on newly established leases to be set at a peppercorn (i.e. zero financial value). In most residential buildings, leaseholders receive very little in return for paying ground rent and it is unclear what value there is, for leaseholder or freeholder, in requiring a ground rent of £10. Monetary ground rents are also an impediment to the adoption of commonhold, which should be a greater priority for the Government, whilst they maintain a risk that forfeiture proceedings might be brought against leaseholders.
130.While the Law Commission is currently undertaking a programme of work to reform commonhold, it will take some years for its proposals to be implemented and for commonhold to become a realistic alternative for most leaseholders. Until that point, freeholders are likely to continue to play some role in the supervision of large and complex mixed-use developments—and we accept that there will be little incentive for them to do so without a monetary ground rent. The Government may need to implement an exemption for mixed-use buildings, until such point that the reforms proposed by the Law Commission and others lead to commonhold becoming a realistic alternative for leaseholders in more complex buildings. Any exempted ground rent should not exceed 0.1% of the present value of a property, up to a maximum of £250 per year.
131.A lease may make provision for leaseholders to pay a fee to their freeholder under certain circumstances—often referred to as permission or consent fees. These are nominally to pay the freeholder’s costs when dealing with applications for such approvals, although permission fees are often disproportionate to the actual administrative, financial or time cost to the freeholder, as well as being intrusive and unnecessary for leaseholders. They are typically charged when leaseholders want to make alterations or extensions to properties (particularly house lessees), but have also been known to be charged for secondary issues, such as changing a mortgage provider. We also heard evidence of permission fees being included in the deeds of new-build freehold properties and enfranchised former-leasehold properties. Some campaigners, including the National Leasehold Campaign, have referred to this practice as “fleecehold”. Several leaseholders told us about the onerous permission fees in their leases:
[ … ] a neighbour informed me that she had contacted the freeholder for permission to [build a conservatory] and they wanted to charge her £3,500. This was to send out their own surveyor to produce a report on the build and then to give permission for it to happen. This was for a construction that did not need local council planning permission - totally unacceptable—Miss Catherine Williams
They charged me around £200 for permission to change my mortgage–nowhere in my original lease states this. But to contest it I can only contact them in writing, which I will be charged an admin fee for—Ms Louise Jones
In the group, we have seen examples of people having to pay to have a pet or to change a doorbell. It costs me £100 if I want to re-mortgage. Every time we contact the management company, it is £108 to ask for anything. That whole secondary income from our homes through permission fees was not even highlighted at all in the purchase—Jo Darbyshire
132.The Government accepted that many people would regard these permission fees as constituting, “an unreasonable interference in the freedoms normally enjoyed by a homeowner.” They noted that leaseholders had found permission fees to be onerous because they can be excessive, they deter buyers, they are a formality, and they are uncapped. The Minister for Housing and Homelessness told us it was “disgraceful that this new model of doing business ever came to the fore” and said that her intention was to push freeholders to not just address onerous ground rents, but “changing completely the issue about permission fees.”
133.However, we also heard that there were circumstances in which it was appropriate for leaseholders to seek permission for certain alterations to their property. John Dyer, representing the British Property Federation, told us that the freeholder or managing agent should be able to recover the reasonable costs they have incurred in granting consent for alterations to their properties:
As managing agent, you have to go in [ … ] to look at where that kitchen is, because you cannot put kitchens above bedrooms and that type of thing. You have to check that is correct. Wood flooring is another one, when someone puts in wood flooring, because the lease quite often says carpeting. You have to check there is adequate sound insulation. Someone has to check that. You have to have an approved specification. You have to sign it off with covenants in any consent that, if it causes a nuisance, you can still lay carpet on top. [ … ] there is a reasonable cost that managing agents, on behalf of freeholders, have to charge to be able to grant that consent in the first place.
Richard Silva, from Long Harbour, noted that the right of freeholders to charge ‘reasonable’ fees for such services was something that could be challenged at a First Tier Tribunal; although, as we will explore in the next chapter, many leaseholders are very reluctant to use existing dispute mechanisms, due to the legal cost and imbalance of power. Further, costs involved in an agreed variation of the lease—which might be needed if, for example, a leaseholder wants to make alterations to the fabric of the building—fall outside this protection. Other freeholders accepted that permission fees were a key source of income, used to cover wider operational costs. Mick Platt, representing Wallace Partnership Group, explained that, “Our entire operation is covered [ … ] by consent fees and permission fees.”
134.The National Leasehold Campaign told us that permission fees should be abolished, arguing that there was “no justification for the level of permission fees currently charged, other than to provide secondary income for freeholders at the expense of leaseholders.” Others, such as Jason Honeyman of Bellway, argued that permission fees should be retained but capped, as it was reasonable for freeholders to recover their costs. Martin Boyd, representing Leasehold Knowledge Partnership, argued that they “should be reasonable”, noting that it was difficult for leaseholders to challenge such fees.
135.Concerns were also raised around the high charges for basic, and often unnecessary, tasks during the sales process for leasehold properties. The Conveyancing Association highlighted what it described as “the increasingly abusive practices of lease administrators”. For example, the issuance of a Certificate of Compliance to confirm that the terms of the lease have been complied with—a process that should take between 10 and 20 minutes—on average costs £125, but can be as much as £250. A Notice of Charge, required if the incoming leaseholder has taken a mortgage and simply confirms the name of the mortgagee—a process which should take no more than 15 minutes—on average is charged at £84. In response to its consultation on Improving the home buying and selling process in April 2018, the Government said it would introduce a cap on such fees and would “investigate the best way in which this could be done”, without setting timescales for this work.
136.It is fair that freeholders should be able to pass on reasonable costs to leaseholders where these have been incurred in the necessary administration arising from a change instigated by the leaseholder. But many of the permission fees and administrative charges we have heard about are plainly excessive, exploitative and yet another example of developers and freeholders seeking to extract money from leaseholders who have very limited recourse to challenge such fees.
137.Alongside its proposal to cap ground rents on future leasehold properties, the Government should require that permission fees in the leases of new-build properties are not permitted to exceed the true administrative costs incurred by freeholders. The Government should also introduce legislation to restrict onerous permission fees in existing leases, as we have recommended for onerous ground rent terms. Compensation for costs already incurred may be appropriate if terms in existing leases are found to have been unfairly imposed upon leaseholders.
138.The growing practice of imposing permission fees in the deeds of new-build freehold properties and enfranchised former-leasehold properties is an unjustified intrusion upon homeowners which many campaigners have rightly referred to as ‘fleecehold’. The Government should require that permission fees are only ever included in the deeds of freehold properties where they are reasonable and absolutely necessary, although we cannot think of any circumstances in which they would be so.
140.We were told that onerous terms in existing leases should be challenged under the Consumer Rights Act 2015 as ‘unfair terms’. Professor Nick Hopkins, Law Commissioner, noted that “We have not really had the test cases identifying how far current law can resolve the real difficulties”, although he highlighted a recent Court of Appeal decision suggesting that, if the buyer had been legally advised during the sales process—which most buyers would be—it would not be possible for them to argue that the terms of their leases were unfair, because there was not an imbalance of power.
141.Sir Peter Bottomley MP, representing the APPG on Leasehold and Commonhold Reform, expressed his view that, “the easiest way of dealing with this, in my view, is either by law or for the Competition and Markets Authority to declare that some of these terms are unfair and unenforceable.” The Competition and Markets Authority (CMA) could exercise its powers under section 130A of the Enterprise Act 2002, to conduct a market study for the purposes of considering whether something connected with the sale of leasehold land might adversely affect consumers and whether steps can and should be taken to remedy that. The CMA’s powers include not only enforcement of competition law, but also the enforcement of prohibitions on the use of unfair terms or unfair business practices. Leasehold Knowledge Partnership said:
In other markets, legislative provisions cancel or mitigate unfair terms [ … ] If it is accepted 10-year double ground rent leases are onerous why can they not be deemed unfair and therefore subject to statutory review? Why should the leaseholder be burdened with additional costs in taking action?
142.We note again, however, the Minister for Housing and Homelessness’s comment that the CMA had been “quite strong in saying that it does not think that there needs to be an inquiry because we know the facts” in the context of mis-selling, referring to the recent Government consultation and our own inquiry. However, neither report concluded whether these terms were indeed ‘unfair’ or ‘unenforceable’. This is a determination more appropriately made by the CMA, so there continues to be an opportunity for them to contribute its expertise in this area.
143.The Law Commission highlighted that it may undertake a future project examining the way in which unfair terms law applies to long leases, although this would be narrow and focus on the availability of unfair terms remedies under the Consumer Rights Act 2015 to more leaseholders (currently restricted to the initial buyer). However, they also noted that the project would be resourced from its core budget, which, since 2010, had been cut by 54% and, consequently, no commencement date had been set for this project. Lakhbir Hans, Deputy Director for Leasehold, Commonhold and Rentcharges at the Ministry of Housing, Communities and Local Government, told us that the Law Commission would be undertaking work on unfair terms, so it is evidently the Government’s expectation that this project will proceed in due course.
145.Alongside a review of mis-selling in the leasehold sector, which we have called to be carried out within the next six months, the Competition and Markets Authority should exercise its powers under section 130A of the Enterprise Act 2002 to indicate its view as to whether onerous leasehold terms constitute ‘unfair terms’ and are, therefore, unenforceable.
146.Were the CMA to determine that onerous terms in existing leases are indeed unfair, or that they were mis-sold, the Government should take further action. Where leaseholders have paid unreasonable permission fees or ground rents over the course of their leases so far, they should have those refunded by freeholders with interest. In such circumstances, the Government should establish a clear and easily accessible route to compensation for affected leaseholders.
138 Though it can take other forms (such as goods or services).
139 Antoniades v Villiers  1 AC 417, 430 (CA, reversed on other grounds in the HL). Peppercorn: other formulations such as “a red rose” have also found favour: see, for example, Souglides v Tweedie  EWCA Civ 1546,  Ch 373.
140 (Heather Wheeler MP, Minister for Housing and Homelessness)
141 Home Builders Federation () and as outlined in Chapter One
142 (Richard Silva, Long Harbour)
143 For example, (Jason Honeyman, Bellway)
144 (David Jenkinson, Persimmon) and (Jennie Daly, Taylor Wimpey)
145 Mr Ashley Bishop ()
146 (Sir Peter Bottomley, APPG on Leasehold and Commonhold Reform)
147 Letter from Heather Wheeler MP, Minister for Housing and Homelessness, 18 February 2019
148 (David Jenkinson, Persimmon, and Jason Honeyman, Bellway)
149 (Matthew Jupp, UK Finance)
150 (Matthew Jupp, UK Finance)
151 (Jason Honeyman, Bellway), (Mick Platt, Wallace Partnership Group, and Richard Silva, Long Harbour) and Taylor Wimpey ()
152 (David Jenkinson, Persimmon)
153 , 10 January 2019
154 , 10 January 2019
155 For example, National Leasehold Campaign (), para 38
156 See, for example, , Which?, 15 October 2018 (“mortgage lenders have cottoned on to leasehold issues, with Nationwide and Santander refusing to approve mortgages… where the annual ground rent is more than 0.1% of the property’s value”) and , FT Adviser, 12 September 2018, (“Ground rent up to 0.1% of the current market value is acceptable. They may accept ground rent up to 0.2% of the current market value subject to review”)
157 Letter from , 11 January 2019
158 (Anthony Essien, Leasehold Advisory Service)
159 Letter from , 11 January 2019
160 Ministry of Housing, Communities and Local Government (), para 36
161 For example, (Martin Boyd, Leasehold Knowledge Partnership)
162 Letter from Rt Hon. James Brokenshire MP, Secretary of State for Housing, Communities and Local Government, to Dr Andrea Coscelli, Competition and Markets Authority, 2 November 2018
163 Letter from , 21 November 2018, and subsequent responses: (11 December), (10 December) and (12 December), and later correspondence from Bellway (26 February) and Redrow (28 February).
164 (David Jenkinson, Persimmon, and Jason Honeyman, Bellway)
165 Long Harbour ()
166 Letter from Heather Wheeler MP, Minister for Housing and Homelessness, 18 February 2019
167 (Heather Wheeler MP, Minister for Housing and Homelessness)
168 Anonymous ()
169 Mrs Kathryn Jones ()
170 Ms Lindsay Moores ()
171 (Professor Nick Hopkins, Law Commission)
172 , Leasehold Advisory Service
173 Ministry of Housing, Communities and Local Government (), para 38
174 (Jo Darbyshire, National Leasehold Campaign)
175 Taylor Wimpey ()
176 (Jennie Daly, Taylor Wimpey)
177 Leasehold Knowledge Partnership () and (Martin Boyd, LKP)
178 , 12 December 2018
179 Which? ()
180 (Jo Darbyshire, National Leasehold Campaign)
181 For example, Mr Richard May ()
182 (Jason Honeyman, Bellway) and (Jennie Daly, Taylor Wimpey)
183 (Richard Silva, Long Harbour)
184 (Matthew Jupp, UK Finance)
185 Which? ()
186 , Financial Times, 30 January 2018
187 (Jo Darbyshire, National Leasehold Campaign)
188 For example, , 10 January 2019
189 (Jim Fitzpatrick MP, APPG on Leasehold and Commonhold Reform)
190 Anonymous ()
191 (Heather Wheeler MP, Minister for Housing and Homelessness)
192 Strictly speaking, it may not be right to refer to this sort of legislation as “retrospective” (see, eg, Craies on Legislation (11th ed 2017) para 10.3.7 and Bennion on Statutory Interpretation (7th ed 2017) para 5.12), but witnesses referred to “retrospective” so we shall adopt the adjective.
193 (Anthony Essien, Leasehold Advisory Service)
194 Taylor Wimpey ()
195 (Amanda Gourlay) and
196 (Giles Peaker)
197 12 EHRR 391 (ECtHR), para 43, and Mellacher, at 44; more recently see Zammit v Malta  ECHR 751, para 52
198  UKSC 46, at 
199  UKSC 3, at 
200  ECHR 703 (ECtHR). There are expositions of this in various authorities. In the UK courts, see Re Recovery of Medical Costs for Asbestos Diseases (Wales) Bill, at .
201  3 CMLR 12
202  1 WLR 1267, at 
203 Law Society of England and Wales (), paras 3.1–3.5
204 Law Society of England and Wales (), para 3.6
205 , 23 July 2018
206 (Heather Wheeler MP, Minister for Housing and Homelessness)
207 , The Times, 23 February 2019, and , The Guardian, 27 February 2019
208 , Department for Communities and Local Government, December 2017, para 69
209 , Ministry of Housing, Communities and Local Government, para 3.11–15
210 (Heather Wheeler MP, Minister for Housing and Homelessness)
211 (Heather Wheeler MP, Minister for Housing and Homelessness)
212 Housing Act 1985, Sched 6 Part 3. It originated in Housing Act 1980, Sched 2 para 11(1).
213 See, for example, , and
214 : The then Government Minister said the rent was not intended to secure continuing income but to “represent in a necessarily token way” the landlord’s interest. He expressed interest in “peppercorn” idea but dismissed it, saying only “I fear that on this point the Government will not want to move.”
215 (Guy Fetherstonhaugh QC) and (Giles Peaker)
216 (Sir Peter Bottomley, APPG on Leasehold and Commonhold Reform)
217 (Dr Nigel Glen, Association of Residential Managing Agents, and John Dyer, British Property Federation)
218 (Martin Boyd, Leasehold Knowledge Partnership)
219 (Amanda Gourlay)
220 (Richard Silva, Long Harbour)
221 (Richard Silva, Long Harbour)
222 (Heather Wheeler MP, Minister for Housing and Homelessness)
223 , 18 February 2019
224 , 15 February 2019
225 ARCO - Associated Retirement Community Operators ()
226 Retirement Home Builders Group (), para 12
227 CSJ Residential (), para 5.5
228 Consensus Business Group (), section 3(c)
229 Which? () and Ministry of Housing, Communities and Local Government (), para 40
230 National Leasehold Campaign (), para 16
231 Miss Catherine Williams ()
232 Ms Louise Jones ()
233 (Jo Darbyshire, National Leasehold Campaign)
234 Ministry of Housing, Communities and Local Government (), para 40
235 (Heather Wheeler MP, Minister for Housing and Homelessness)
236 (John Dyer, British Property Federation)
237 (Richard Silva, Long Harbour)
238 Mehson Property Co Ltd v Pellegrino  UKUT 119 (LC)
239 (Mick Platt, Wallace Partnership Group)
240 National Leasehold Campaign (), para 46
241 (Jason Honeyman, Bellway) and (Martin Boyd, Leasehold Knowledge Partnership)
242 Conveyancing Association ( and )
243 , Ministry of Housing, Communities and Local Government, April 2018, para 180
244 (Professor Nick Hopkins, Law Commission)
245 (Sir Peter Bottomley, APPG on Leasehold and Commonhold Reform)
246 Leasehold Knowledge Partnership ()
247 (Heather Wheeler MP, Minister for Housing and Homelessness)
248 Law Commission (), para 1.2
249 (Lakhbir Hans, Deputy Director for Leasehold, Commonhold and Rentcharges, Ministry of Housing, Communities and Local Government)
Published: 19 March 2019