The effect of the ‘ground rent scandal’ on Registered Providers

Following what the Guardian recently branded the ‘ground rent scandal’ where owners of leasehold houses, in particular, were highlighted as facing spiralling ground rents, the Government has set out plans to prohibit leaseholds on all new-build houses where the developer is not obliged to sell the house on a leasehold basis along with potentially reducing ground rents on all new leases (with the possible exception of dwellings sold under the right to acquire or right to buy) to a ‘peppercorn’. So what will this mean for housing associations?

Many Registered Providers have had to become much more diversified businesses to thrive and as such many will not only have sold shared ownership flats, but will also have progressively increased the amount of flats sold on the open market.

Whilst we don’t anticipate that Registered Providers will have intentionally set onerous ground rents,  the issue is that the ground rents reserved under those leases granted by RPs may now face scrutiny.

As a result of the scandal, Sajid Javid, the Community Secretary has called for restrictions on ground rents to as low as zero. Any future legislation is likely to favour homeowners with Javid stating, “Our proposed changes will help make sure leasehold works in the best interests of home-buyers now and in the future”.

There is also a fear that mortgage lenders will refuse to lend against leasehold properties with ground rents. Nationwide have already announced in May that they would no longer lend against any new-build leasehold flat or house where the ground rent was more than 0.1% of the value of the property. The building society would also refuse loans on new flats with lease lengths of less than 125 years, or new houses with less than 250 years.

Registered providers may also face challenges from current leaseholders whose properties are subject to ground rent and calls to vary their leases. How existing ground rents are dealt with is something that DCLG are seeking views on in their current consultation.

Whilst the proposed reforms are primarily  a reaction to house-builders who dispose of their reversionary interest to ground rent investors leaving  homeowners with doubling ground rents which are in no  way reflected in the price they paid for their home , any changes will almost certainly have an effect on housing associations too. It remains to be seen whether legislation will prohibit ground rents outright or whether they will be capped. Only then will the full effect of the reforms become evident.

If you require any further information on how these changes may impact you, please contact our specialist Social Housing team.