Guides & Advice

What do RPs need to know about the Leasehold Reform (Ground Rent) Bill?

Published: 2nd July 2021
Area: Real Estate & Planning

The new Leasehold Reform (Ground Rent) Bill means that new long residential leases will be free from ground rent and leaseholders will no longer be subject to unexpectedly high costs payable annually. However, its implementation has the potential to impact on registered providers (RPs) guaranteed income streams.

Who will the Bill affect?

As the Bill currently stands, existing leases with ground rent included in the contract will remain unchanged. However, new leases, including those on existing developments, will have to be sold with a lease that has zero ground rent.

At present, only shared ownership leases are exempt. However, landlords and leaseholders should bear in mind that this could be subject to change as the House of Lords wants to include measures to protect shared ownership leaseholders. This will now be considered at the Committee stage.

Financial considerations

While not all RPs charge ground rent, it can be a vital source of income for those that do and helps to fund future social housing projects. However, once the reforms have been implemented, major changes to the way RPs fund developments may need to be considered. Currently, if an RP has sold off every flat in a building with a ground rent, the freehold land can then be sold onto a third party who can continue to generate an annual return from the rent.

Moving forward, with no ground rent to be included in new leases, the value of the freehold will be substantially reduced, and RPs will receive no ongoing revenue from the land, other than from the delivery of the management services. Once the flats have been sold to the tenants, they will no longer serve a social purpose and may become a drain on the RP’s resources, where these could be focused on their newer social housing stock.

The impact on social housing

The later living sector is also likely to be impacted. Currently, ground rent charges in retirement developments fund communal areas and additional services. Without them, funding will have to be found elsewhere. While the Government initially agreed that retirement homes would be exempt from the Bill, they have only instead chosen to delay implementation until April 2023 for this sector.

However, not all is doom and gloom. RPs that acquired flats in blocks from developers in the future, would most likely have found themselves owning properties with doubling ground rents, which they would have to pass on to their tenants, creating a further barrier to affordable housing. As a result, for RPs buying housing under Section 106 agreements following implementation, the Bill is a positive.

Moving forward

As existing leases aren’t impacted, RPs will still be able to collect ground rent to some extent, but they will need to factor in this loss of revenue with any future housing projects.

The changes mean that it is essential for RPs to review the viability of their current housing models. Purchasing or building flats with a view to selling on the freehold asset for a capital sum may no longer be a practicable option, so further innovation to generate revenue will need considering.

Although a welcome step for leaseholders, these reforms are yet another hurdle to jump for providers of affordable housing, removing an income stream that has historically not been crippling for its residents, but instead has provided a regular income stream to help in the delivery of their affordable housing products..

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