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Housebuilder Seeks Exemption From Planned Ground Rent Ban

Housebuilder Seeks Exemption From Planned Ground Rent Ban

Land development and house building

The UK’s largest retirement home builder, McCarthy & Stone, has readjusted its profit expectations to project “a more modest growth trajectory” over the next two years following government plans to scrap ground rent on flats in England.

The company, which controls 70% of the UK’s retirement housing market, is seeking an exemption from the proposed changes for developers in the retirement housing sector, on the grounds of the unique viability model of retirement housing.

Last year, the government proposed several measures to penalise companies seen to profit unfairly at tenants’ expense, in response to public concern over the unaffordable price hikes facing renters.

These measures included banning developers from selling new-builds as leasehold homes and scrapping apartment ground rent (the generally annual fee which lessees must pay to the freeholder as a condition of their lease).

Caught in the crossfire

McCarthy & Stone say that the retirement home building sector has been “caught in the crossfire” of these measures.

Like many developers in the ordinary residential sector, the company sells its retirement flats leasehold, with freehold sold to private companies.

The government alleges that the number of new-build leasehold properties has “more than doubled” in the last 20 years due to developers and freeholders taking advantage of the system to drive up prices.

In the case of retirement housing however, McCarthy & Stone argues that profits from separate freehold sale create funding for additional, quality facilities such as communal areas for elderly residents, and so should be allowed to continue.

Analysts weigh the effects of ‘Ground Rent Day’

The intervention of the government’s plans and resultant market uncertainty has led developers to seek price renegotiations with land sellers, leading to a decline in new land acquisitions and planning consents.

This effect is evidenced in McCarthy & Stone’s half-year figures: in the six months up to 28th February 2018, the company secured 22 land exchanges and 21 planning consents, down from 30 and 34 respectively in the half-year to February 2017.

Pre-tax profits fell significantly between these periods, from £21.87m in February 2017 to £10.5m in February 2018.

Nevertheless, company CEO Clive Fenton noted that the group’s legal completions were up 13% from last year as of this April, saying that he remains confident “that the full year out-turn will be within the current range of analyst forecasts, albeit there remains some uncertainty created by the Government’s announcement on ground rents.”

Jeffreys analyst Anthony Codling shared Mr Fenton’s optimism, stating: “It seems to us that currently investors cannot see past McCarthy’s ‘Ground Rent Day’, but we see significant upside for the price of McCarthy’s shares once it leaves ‘Ground Rent Day’ behind.”

UBS however said that in light of McCarthy & Stone’s “cautious response to the government’s announcement on ground rents . . . We expect a negative market reaction given a more cautious approach to land buying.”

Government reforms leases to tackle ‘practically feudal’ practices

The Department for Communities and Local Government’s consultation response addresses flawed and “practically feudal” practices in the UK property sector and recommends a significant overhaul of the regulation of leasehold sale to reflect its shift from “niche market” to “major tenure.”

It recommends that ground rent should be banned and new builds should not be purposed for leasehold sale “in the majority of cases” simply to profit the freeholder and allow developers to sell freehold for higher prices.

Communities and Local Government Minister Sajid Javid affirms that leasehold contracts which place an “unjustifiable” burden on the lessee would no longer be allowed. He says: “Some of these leases contain exceptionally onerous terms, creating future liabilities that can leave homeowners stranded and unable to find a buyer.”

McCarthy & Stones’ argument that retirement homes put profits to the benefit of mobilising and improving quality of life for elderly residents may however find favour with the government as discussions of an exemption continue.

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