Malcolm Bradley
“I am a 69-year-old representative owner for my 65-year-old wife of three freehold properties in West Sussex.
We acquired these freeholds (with a total of 76 leaseholds) in 1995 paying with taxed money. The leases were all for 125 years from 1987 and 1988. The ground rents have stopped increases that double every 20-25 years. The effect is the equivalent to an average of about 3.37% p.a. compound annual increases. However, to date that figure is 2.32% p.a. As such our ground rent income is pretty much keeping in pace with CPI inflation. The ground rent on the original leases commenced at between £50.00 and £115.00. Our view was that my wife could retain these freeholds as a secure income for retirement for the benefit of both of us. It could even benefit our children when we had deceased. This was the driver for investing in freeholds rather than directly into a personal pension fund with the benefit of tax relief.
We have been very responsible landlords ensuring the best value for all leaseholders by appointing managing agents with whom we work with tirelessly. Two of the three freeholds are retirement properties and have required significantly more attention to detail as, in each development, there is a large communal area and gardens to look after.
We have built a really strong relationship with our leaseholders over the past 30 years and indeed own a leasehold interest on one of the sites which we let out. We have explained the impact of commonhold v leasehold to our leaseholders and have offered to extend all leases and approximately one third have done so.
Owing to completely unrelated factors my pension has been all but eradicated, meaning that the income we derive from the ground rents is now a significant part of our pension planning.
As all the leases were written under English law, we naturally believed that we had secured a long-term, dependable pension-type income paid for out of taxed money. The proposals under the draft legislation aim to flatline ground rent income to a maximum of £250.00 per leasehold and be removed entirely after 40 years. It seems extraordinary that any UK government should consider such a move. This would be crippling to our financial future as we could lose or have impacted up to 40% (and maybe higher) of our retirement income.
Moreover, it seems to be an act of enormous financial self-harm to this country. It surely cannot help our nation if overseas investors reconsider investing in our country. However, if they witness the government legislating against legally binding contracts by flatlining and then eliminating legally binding ground rent income then this could have a very sobering impact on any existing or future investment decisions.
In considering all this, if the government wishes to pursue the eradication of ground rents from contracts that are legally binding then one would hope that adequate compensation would be provided. We understand that the advice of the Treasury was not to pursue existing leasehold contracts. This advice was ignored in the draft legislation. With no ground rents permitted on new developments and leaseholders having the opportunity to buy out their ground rent contract with the freeholder, it is puzzling as to why the government is proposing legislating against past property contracts.
If the legislation is enacted as proposed then we would suffer significant loss, both in the value of our freeholds and the income we receive. Despite this we would still be expected to be the same responsible freeholders we have always been. Bar those in the freehold/ground rent industry we know of very few people who are aware of what the government is trying to do. The leaseholders of our freehold properties have all entered contracts to buy their leasehold interest and most properties have passed hands several times since they were built in the 1980’s. All owners could have chosen to not purchase their property. Instead, they chose to pay a purchase price with the obligation for a small ground rent payable annually; that is the contract they chose and willingly entered.
From our perspective if this legislation goes through, we will have much less incentive to maintain the properties as they are, and our interaction with the managing agents will deplete over time. This is likely to be replicated elsewhere, and the leaseholders will be all the poorer for it. Moreover, we do not see commonhold as a solution, especially for retirement properties, as when we explained to the leaseholders in a Q&A session what commonhold meant they did not want the burden of being responsible for managing the property themselves. Regrettably if the proposed legislation is enacted we will not be able to afford to help as we do now.
Pension fund income is another area of significant impact. The flatlining and then loss of ground rent income acquired by Pension funds will affect a vast number of retirement funds that had added this income to balance their portfolio. The impact will be far and wide with no demonstrable benefit.
So, to summarise the impact if the proposed legislation was enacted:
1. We would suffer significant asset value depletion and an approximate 40% loss of income over time. There would be an effective wealth transfer from freeholders to leaseholders without compensation.
2. Our properties will not receive the same attention to detail as currently and this will impact the long-term quality of the developments [Commonhold is not a solution that retirement leaseholders want].
3. Large scale freehold owners will similarly be affected impacting the future maintenance of the properties. With no remuneration for staying on top of the properties there is little incentive for freeholders to maintain the properties properly which can only be to the detriment of leaseholders and the value of their homes.
4. Pension fund asset values will be severely impacted which will have a knock-on impact on private pensions.
5. If successfully challenged, the government may have a huge compensation claim that is estimated to exceed £30B. This is hardly an attractive proposition for a government facing a very bleak current financial outlook.”