Leasehold Reform (Ground Rent) Bill [HL]

Written evidence submitted by Stephen Clacy (LRGRB02)

Leasehold Reform (Ground Rent) Bill

Dear Sirs

I am a freeholder and we are involved in the granting of new leases, most of which are non-statutory. We do around 50 transactions a year

I note that there is a requirement in the bill to advise the lessees of their rights and amendment 3 that is proposed states

" Before entering a formal or informal renegotiation or extension of an existing lease, the landlord must inform the tenant of the changes introduced by this Act, if the sections of the Act in relation to prohibited rent are not yet in force "

I believe there is an opportunity for a further amendment to this sensible precaution suggested in amendment 3 to help lessees make informed decisions when renegotiating their lease - the Net Present Value (NPV) of the ground rent retained going forward should be calculated and disclosed to the lessee - this will ensure that the financial burden the ground rent that continues to be imposed on the property going forward is clearly understood and reflected in the premium paid 

The problems of 10-year doublers would have been immediately apparent if the NPV of the rent was disclosed next to the premium in the prescribed clauses of the lease – Box LR7. A ground rent of £350 doubling every 10 years for the first 6 anniversaries has a NPV when a discount rate is used of 5.5% of around £39,000 Had lessees seen that figure disclosed next to the premium in the draft lease it would have altered them to the size of the rent. Then they could have either rejected the proposed rent or ensured that the premium they paid reflected the burden of the rent they are being asked to pay   

There is an analogy with a credit agreement. The obligation to pay a ground rent is part of the overall consideration the freeholder seeks for granting a lease. It is of course for no service and therefore should result in a reduction in the premium. The greater the rent, the greater the discount. Therefore, the ground rent is akin to an interest payment for a discount. The Consumer Credit Act requires the lender to disclose the APR of the transaction, so a purchaser of credit can make comparisons - the ground rent being for no service is clearly a negative burden on the property but is value and implications are not disclosed readily. If the granting of the lease there was a requirement to show the  NPV of the rent lessees can focus on what this burden means. 

The calculation would require the government to set the discount rate, but the calculation thereafter is not complicated.

Yours faithfully

Stephen Clacy 

December 2021