Wayne Rolfe

“Our company was formed in 1985 by two working-class brothers who, after working long and strenuous hours, invested their savings.  Any profits were always reinvested to grow the business. We are a family-run business and own a relatively small number of ground rents and are certainly not a large corporation. The proposed bill will significantly impact our employees, their pensions and futures.

The recent debate in Parliament focussed almost exclusively on service charges and property management issues. Ground rent is an almost dormant issue when compared to the cost and volatility of service charges. The overwhelming result of the Government’s own leaseholder surveys confirms ground rent is of very little consequence to leaseholders and that service charges are their major concern.  We do not see any issue introducing reasonable legislation in relation to service charges.

I recently discussed the proposed legislation with an MP, who suggested he wished to correct what he called “injustices”. I would suggest that being encouraged to purchase perfectly legal assets, with the price effectively set by Acts of Parliament (i.e. amongst others, the Leasehold Reform, Housing and Urban Development Act 1993), agreed between two consenting parties, and then to “change the rules without compensation,” is an injustice and plainly wrong. This is the largest intervention into private contracts ever proposed by the UK government, with losses to investors of between £10bn and £40bn, for the proposed ground rent cap alone. How can that be just?

Even though we have acted correctly and “done the right thing” the proposed bill is effectively saying, we have a hatred for landlords, and we are going to take what you are entitled to and give it to someone else, without any form of compensation. What message does that send to anyone who works hard, takes risks, provides employment, pays taxes, etc?

Many leaseholders are themselves investors (approximately 40% of our portfolio). The proposed legislation is robbing one class of investor to give to another. Additionally, many leaseholders have agreed to extend their leases on non-statutory terms, for a premium lower than the statutory premium, while continuing to pay a ground rent. This further evidences the agreed premium combines two elements: the initial premium and the right to receive ground rent in accordance with the lease terms. How can it be fair that those same leaseholders now seek to benefit from a proposed ground rent cap, when they have benefited from a lower premium?  

Freedom of contract no longer appears sacrosanct. The proposed bill is the statutory intervention to retrospectively rewrite the agreement struck between two consenting parties. A price can be a mixture of immediate and deferred consideration. When the leaseholder acquired the flat, they agreed a commercial bargain to pay the initial price and, in addition, to pay a ground rent throughout the lease term.  The leaseholder would have adjusted their offer to take account of the payment of ground rent (i.e. deferred consideration).  Furthermore, the Developer would value any offer against their total outlay and the required return for which both the premium and the ground rent will have been components. Without the requirement to pay ground rent, the premium to sell the flat would need to increase. Any subsequent leaseholder would have made the same adjustments to the premium offered for the flat, to reflect the deferred consideration to pay ground rent clearly defined in the property’s lease. How can it be reasonable, years after the agreement, where one element of that consideration (i.e. the payment of ground rent) can be cancelled.  Many Developers will have sold their property’s freehold to investors, and therefore, it will be those investors who will be affected by the proposed bill, with the Developer long since having received their money. Additionally, in accordance with legislation, before being able to sell any freehold property, the leaseholders would have been offered that property on the same terms, including the price paid, and would have declined. While complying with the legislation that effectively sets that price, and the leaseholders being offered to purchase at that price, however declined, the proposed bill now seeks to lower value of that investment the landlord would have paid and effectively pass that value to the leaseholder. How can that be just, or correct?

While the landlord’s value, at the Relevant Date defined by the BSA, would have been valued in accordance with the legislation that existed at that time i.e. the right to receive ground rent in accordance with their properties’ leases, the right to receive marriage value if the lease were extended or enfranchised etc. the proposed bill seeks to undermine and reduce that value. The proposed bill has reduced the value of the freeholder, and on that basis, the leaseholder may not have been entitled to protection had that value been ascertained now. While the Freeholder at the Relevant Date, may be obligated to contribute to rectify defective buildings, if the right to receive ground rent and other attacks on Freeholder’s income, from where are the finances to be generated to do so. While the proposed bill will lead to the collapse of many freeholders, this will seriously affect and delay any remedial works required to be undertaken under the BSA. How can that be fair and just?

On reviewing any property’s lease, it can be clearly seen that the payment of ground rent is not for the provision of management services. The lease clearly details who has the obligation to maintain the property. This may be the landlord. However, very often, that obligation is with the leaseholder or their Management Company. The leaseholders pay their service charge to the entity responsible for that management obligation. However, the payment of ground rent, is part of the deferred consideration agreed when the lease was granted and is clearly defined in the property’s leases. It is not hidden. It is a clear commitment to pay that ground rent throughout the term of the lease.

There are obvious costs just being the freeholder, for which they do not receive any reimbursement, especially when the obligation to maintain is with another party. Simply being the freeholder, means other parties e.g. local authorities, neighbouring properties, third parties, service providers for common parts or individual flats, will simply contact the freeholder to resolve any issue they may have, rather than reviewing the leases to understand who has the obligation. The freeholder will incur costs to resolve those issues, without having any means to be reimbursed for that cost. The freeholder will not be able to pass on that cost and would normally “off set” that obvious cost against their income e.g. the payment of ground rent, marriage value. However, while the proposed bill seeks to attack the freeholder’s income, the costs simply remain with the freeholder, with, in most cases, the freeholder being unable to pass that cost on to the responsible party. How can that be just?

While the freeholder’s income is defined by their properties’ leases and existing legislation i.e. the payment of ground rent in accordance with the properties’ leases, Marriage Value to be received on the leases being extended or enfranchised, the payment of valuation and legal costs for enfranchisement or lease extension, and therefore should be secured, many Freeholders will have secured loans against that income. Obviously, irrespective of the proposed bill, any debt will need to be repaid in accordance with the loan covenants and if the proposed changes were imposed, including the capping of ground rent, the loan covenants will be breached, and the bank is likely to eventually call in that loan, which may well cause the collapse of many freeholders. This will obviously impact the ability to pay employees and their pensions. The employees’ futures are tied to the freeholder’s success. Any freeholder collapse will affect their leaseholders, the management of those properties, the leaseholders’ ability to sell their properties, work required under the BSA etc… Many freeholders may simply choose to “walk away” from the properties with little income and effectively leave those properties “as ghost estates.”