Blog - 07/07/2021
Ground Rents – A Tale of Two Cities?
Ground rents have become problematic in two quite separate areas of law: firstly on the acquisitions of freeholds or extensions to leases from landlords under the enfranchisement legislation, and, secondly, more recently, on the grant of new leases, usually by large developers, with wildly escalating grounds rents.
Since 1967, governments have approached the first of these problems by the forced sale of freeholds and lease extensions to tenants in return for compensation being paid by the tenants in accordance with the statutory rules. Part of the purchase price is calculated by adding up the ground rents which would have been paid if the lease had not been extended, and then reducing the total to account for the likely inflation in the future. Successive Acts of Parliament have adjusted the way in which these sums are calculated, and progress has been slow and sometimes hesitant. The second problem is being dealt with by using existing consumer protection legislation to ascertain if the ground rent terms are unfair to the consumer and, if so, whether the property was ‘mis-sold’ in the first place. This is a bold new approach.
It is with the second of these problems that the Competition and Markets Authority (CMA) issued another Press Release on 23 June 2021 with the news that Persimmon will allow its leaseholders to buy their freeholds at a discount and Aviva will repay homeowners who saw their ground rents double.
The CMA has now given greater detail of the legal provisions on which it is relying in two separate areas, namely ground rent terms and mis-selling.
In relation to ground rent terms the CMA is relying on Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs) for contracts entered into before 1st October 2015, and Part 2 of the Consumer Rights Act 2015 (CRA) for contracts entered into on or after 1st October 2015. But neither UTCCRs nor the CRA 2015 apply to contracts for the selling of leases of more than 21 years when first granted.
In relation to mis-selling, the CMA is relying on the Consumer Protection from Unfair Trading Regulations 2008 (‘the Regulations’). These aim to protect consumers from misleading statements or the omission of information in the sales process. So if, when the developer marketed the flats it intended to sell, it produced a brochure giving a description of the flat, the price, the length of the lease and so on, but it omitted to say that there would be a wildly escalating ground rent to pay as well, then that is misleading omission and the consumer who signs the contract comes within the Regulations.
The definition of a ‘Product’ in the Regulations specifically includes ‘immovable property’ and the guidance from the Office of Fair trading (OFT) on the Regulations in 2008 re-iterates that the Regulations do cover the sale or lease of land. (Section 4, paragraph 14.18).
Regulation 6(1) states that a ‘Commercial Practice’ includes a misleading omission if it omits material information. Although the Regulations provide for civil and criminal enforcement, Regulation 14 states that no proceedings for an offence can be commenced more than three years after (the misleading omission was made), or more than one year after the discovery of the offence by the prosecutor. It is likely that many, if not most, material omissions were made more than three years ago now and, given the number of developers who were approached by the CMA before their press release in 2019, more than one year has passed now for most of the developers who have been targeted.
Furthermore, while Regulation 19 places a duty on every enforcement authority (which includes the OFT) to enforce the Regulations, paragraph 11.1 of the OFT Guidance makes clear that this does not mean that enforcement action must be taken in respect of every infringement. Enforcers need to produce compliance by the most appropriate means in line with their enforcement policies ‘and consistent with their resources’.
And paragraph 11.2 states that education, advice and guidance can be used as well as civil and criminal enforcement.
In other words, in view of the sheer number of these leases, the OFT does not have the resources to prosecute each individual landlord. Which must be why the Government is targeting a few large companies and why, following the Press Release on 23 June, Robert Jenrick, the Housing Minister, tweeted d “Persimmon and Aviva have … done the right thing at last, now other developers and freeholders MUST FOLLOW”.
But there are numerous smaller blocks of flats, which are not newly-built, owned by individual landlords where the ground rents escalate strongly, although maybe not as much as doubling every 20 years. Many of these leases were granted quite a few years ago. Many of the original purchasers have sold the leases on so that the current owners would have no redress under the current Regulations and would be unlikely to attract the attention of the OFT in view of its finite resources.
Does this mean that the thousands of smaller landlords, many of whom have borrowed money to acquire ground rent investments, can now heave a sigh of relief? The answer is ‘not necessarily’. The Government’s Press Release of 7 January 2021 confirmed that legislation will be introduced so that when the term of an existing lease is extended by up to 990 years, and the ground rent is reduced to zero, the ground rents in these cases will still have to be bought out by the tenant, but that a cap will be introduced on the amount.
So, for landlords and tenants of existing leases, everything will depend on where the cap is placed. Probably neither landlords nor tenants will be completely happy wherever it finishes up, but that is something which would have made Dickens smile.
If you have any queries about this topic, please contact Alastair Hutchinson or any member of the Property team.
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