The Leasehold Reform Act and its aim to abolish or cap ground rents, eliminating the perceived exploitation of homeowners and making it easier and cheaper to purchase freeholds has sparked ongoing debates about whether or not it would be a positive transition. Last December, Housing Secretary, Michael Gove, launched a consultation on part of the proposals.
David Goldberg, CEO of property management services company POD Management, offers his opinion of why changes to ground rents may not be all good news for leaseholders. More specifically, he says that abolishing ground rent could, in practice, negatively impact the long-term safety of leaseholders and promote further bad practice by freeholders.
It’s important to recognise the positives that will come from this reform; the change is complex and not every potential outcome will be negative. For example, it will give leaseholders more power and control, make it easier to enfranchise (buy a freehold), necessitate greater transparency over service charges, remove opaque costs/commissions, and make it cheaper to own a leasehold by removing a yearly outgoing.
However, many believe abolishing ground rent will tackle the issue of spiralling service charge costs – I disagree.
Although some costs come from property managers or freeholders adding costs in a clandestine way, they are the minority. This reform is a sledgehammer approach to a limited issue; most property managers operate professionally, and the real problem is that leaseholders often don’t understand what a managing agent is responsible for, the time they invest, and the necessary costs involved.
Addressing these misconceptions would be much more effective strategy, especially when considering the potential consequences that come with abolishing ground rent.
Firstly, this would remove income for freeholders. Without any financial incentive, why would they accept the responsibility of maintaining common areas? There will be nothing to offset their risk and no justifiable reward.
The law is robust in that, should a building fall into disrepair, the freeholder must step in to carry out and fund the works until monies can be recovered from leaseholders. If ground rent is removed, how are freeholders expected to front these costs?
Meanwhile, should leaseholders take control of their freeholds, the responsibility to front costs would fall onto them – how would they fund this if there is a proportion of fellow leaseholders unwilling to contribute?
Additionally, in some instances a specialist set of property management skills is required to ensure the right works are carried out, particularly when it comes to safety and compliance. I question whether lay people will make the right judgements about what’s required and when costs are necessary, in an attempt to limit the cost of service charges.
The law surrounding leasehold is extremely complex, with many areas that could trip people up if they don’t know what they’re doing; at POD Management, our specialist team members undergo extensive training and have years of experience – I would not expect leaseholders to have this level of understanding, but it is crucial.
I am also concerned about the changes encouraging already unscrupulous landlords to be increasingly unethical in their business, using immoral tactics to offset lost income. Ultimately, they do this to make money; if their income is cut off, they will look to claw this back. I foresee them finding ways to extract income from managing agents and contractors appointed to maintain the building they are responsible for, ultimately increasing the cost for leaseholders as firms pass the cost on to the end consumer.
The intention behind this reform was right; to give leaseholders more control. However, I do not believe abolishing ground rent was the answer. Instead, they could have looked to professionalise freeholders, ensuring they have certain qualifications or capital requirements to be in business, make their position more stringently regulated, and educate leaseholders about the true costs of owning a shared asset.
In practice, this would have improved the transparency of our industry without creating unnecessary risks.
