Part 2: The Escalating Ground Rent Scandal: The Problem for Developers

This is the second and final part of our series looking at the issue of escalating ground rents. This part will touch on some of the problems being faced by developers.

Developers who have become accustomed to building their estates and selling the houses by way of new leases, retaining for themselves a very favourable ground rent provision are now on notice, due to considerable adverse publicity, that this practice is likely to be stopped.

In recent decades, many developers have built residential estates, sold the houses off by way of long leases and retained for themselves an initial ground rent, which then rises substantially throughout the term of the lease, for example doubling every ten years (see our part 1 article on this for an example).

These ground rents represented an excellent and ongoing income stream for developers, or otherwise they could be sold to one of the many large ground rent acquiring companies, who pay a premium to the developer to take on the benefit of the ground rents. This premium represents more profit for developers.

The government is currently consulting on plans to ban developers from selling houses as leasehold, or to reduce the amount of ground rent which can be charged to as little as zero (or a ‘peppercorn’ as has traditionally been the case).

The media attention this matter has attracted means that many residential conveyancers who were not previously on the look out for doubling ground rent clauses are now up to speed on the risks of these and will no longer overlook them.

For developers, this means that where they have leasehold schemes that are partially built, they are facing difficulties selling the remaining units, and any new build schemes will not be subject to the developer-friendly ground rent charges, for fear that the units will not be sellable.

Because of the uncertain future regarding changes in the law affecting leasehold houses, many developers are seeking to sell their freehold interests in leasehold schemes which they have finished building, and there are still lots of companies prepared to pay significant sums for these sites.

If you are a developer interested in selling freeholds or you have a question about ground rent, please do not hesitate to contact either Andrew Mackenzie in our Runcorn office or Zoë Paton-Crockett in our Gadbrook Park office who would be happy to assist.