Here's how investment firms 'hitch a ride' on the UK property market with ground rents

A row of new-build houses in EnglandShutterstockA row of new-build houses in England

LONDON — England is one of the few places where you can own your own home and still have to pay rent.

But that could be about to change.

On Tuesday, the government announced radical plans to crack down on “unfair charges” levied every year on millions of homeowners in England.

Their target was leasehold properties, and the soaring ground rents that accompany them. Communities Secretary Sajid Javid is proposing a ban on leaseholds and potentially reduce ground rents to zero.

Leasehold agreement have existed in Britain for centuries.

So what are they, and why have they only recently become a scandal?

What are leaseholds?

When a house is purchased as a leasehold, the buyer is effectively only a tenant, albeit one with a tenancy agreement that typically lasts for up to a century. The freehold — the building as well as land the property sits on — is owned by someone else, often the builder that sold the property, or an investment firm.

England and Wales retain particularly draconian rules regarding ground rent, according to Sebastian O’ Kelly, director of the Leasehold Knowledge Partnership, a charity which lobbies against and disadvantages and unfairness in the leasehold sector.

“English leasehold law is an absurdity,” he told Business Insider. “Everywhere else in the world, including countries which have English law as their legal system, have abandoned them. There’s no leasehold law in Australasia, North America, or even Scotland, let alone continental Europe.”

Elsewhere, owners have a form of common-hold.

“If you own a flat in France or Italy, you and your neighbours all own the building — the land, the roof, the lift-shaft, the corridors. And you pay [to maintain] them. In England, a leasehold is a tenancy. That means you buy a number of years within some walls. You don’t own the building or the land.

“People often think you just don’t own the land, but you don’t own the building either,” he said.

Around 4 million — or 21% — of privately-owned properties in England are leaseholds, according to 2014/15 figures from the Department for Communities and Local Government (DCLG).

“Buying and selling apartments on a leasehold basis is a long accepted form of ownership and provides security for people with communal facilities,” a spokesperson for the Home Builders Federation said in an email.

“The industry is committed to working with all parties to ensure that the terms on which leasehold homes are sold are fair and work for the homeowner,” the HBF said.

What are ground rents?

Ground rents are annual charges paid by the leaseholder to the freeholder. The leaseholder must also seek permission from the freeholder to make changes to the property, such as building an extension. That process typically comes with charges, too.

Why are ground rents a recent problem?

Historically, leaseholders would usually play a nominal fee in the region of £10 a year, known as a “peppercorn” rent, to the freeholder in order to enforce the terms of a lease. That began to change around the turn of the century when developers spotted the potential for a huge new revenue stream.

They began to insert clauses into leasehold contracts, some of which saw ground rents double every ten years, often reaching thousands of pounds.

How much do ground rents cost?

Research by Direct Line for Business last year found that ground rents are now on average £371 a year on new-builds and £327 on other properties.

Coupled with the service charges owners pay each year on general property maintenance — which stand at an average of £1,863 a year — a 40%-rate taxpayer would have to earn an extra £5,200 a year before tax just to service the property.

The DCLG on Tuesday cited examples of:

• A homeowner being charged £1,500 by the company to make a small alteration to their home;

• A family house that is now impossible to sell because the ground rent is expected to hit £10,000 a year by 2060;

• A homeowner who was told buying the lease would cost £2,000 but the bill came to £40,000.

Who typically owns the freeholds?

This is where it gets interesting. Builders may sell physical properties for someone to live in, but sell the freehold claim to ground rents to investment firms, leaving the houseowner with an ever-growing rent bill.

“I don’t think a democracy can function with this scale of evasion”

“A lot of these freeholds are owned offshore, and most are owned by interests which hide their beneficial ownership behind nominee directors,” said O’Kelly. “Why is so much of this smoke-and-mirrors behaviour felt necessary in this sector?”

“The truth of the matter is, owning the freehold to a block of flats — or a portfolio of leasehold houses — is a brilliant way of hitching a ride on the UK residential property market. If you can do so anonymously, and off-shore, all the better [for them].”

“It’s an utter disgrace that £260 billion worth of residential and commercial UK property is owned offshore where the ultimate beneficial ownership is hidden,” he said. “I don’t think a democracy can function with that scale of evasion.”

“It’s about social responsibility as much as anything else. It’s a huge chunk of the nation’s wealth. You cannot have this amount of wealth owned by people about whom we know nothing.”

The “pass-the-parcel” underworld of freeholders

A Guardian report published on Wednesday explores the “pass-the-parcel” world of freehold owners. Tracing back the ownership of a five-bed home in Bolton, the paper found a network of shell companies, offshore groups based in the Channel Islands, and aristocratic landowners with stakes in firms which derive revenue from expensive ground rents.

One such company is Adriatic Land 2, a private firm which purchased the freehold on the Bolton home named in the Guardian report from building firm Taylor Wimpey. Companies House records show that Adriatic Land 1, registered at the same central London address, listed William Astor as a director:

Astor, the half-brother-in-law of ex-PM David Cameron, runs the Long Harbour fund, and its portfolio shows that leaseholds are now very big business. The Long Harbour Ground Rent Fund says on its website that it holds “over 160,000 residential units comprising approximately £1.4 billion of assets to date.”

I don’t think a democracy can function with this scale of evasion

The Guardian says Adriatic Land 1 is ultimately controlled by Dublin-registered firm Jetty Finance DAC. Its accounts show it paid no corporation tax in the year to March 2016, although there is no suggestion of wrong-doing.

Other firms registered at the same London address include Fairhold Homes, which owns over 50,000 freeholds on retirement homes in England. In October last year, Fairhold was the subject of action from residents in one of its Berkshire properties, who successfully lobbied to cut their annual service charges from £2,500 to £1,600.

What happens next?

The proposals are subject to an eight-week consultation. If successful, the government will consider how far to cap existing ground rents and try to ban leasehold transactions altogether.

Communities Secretary Sajid Javid said: “Enough is enough. These practices are unjust, unnecessary and need to stop.

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