We previously brought you the news that the government were planning to bring an end to ground rent following a consultation, with a number of options on the table. A number of news organisations have now reported that Michael Gove’s ambition to reduce ground rent to a peppercorn rate has been blocked by both the Prime Minister and Chancellor. Instead, it looks as though a ground rent cap at a nominal level of £250 per year which is phased out over 20 years will be introduced as a potential compromise.
The Housing Secretary, Michael Gove, had previously stated that among the options, his preference was for ground rent to be reduced to a peppercorn amount. However, it seems that this has turned out to be false hope for leaseholders.
The Sunday Times, who have reported the announcement, revealed that the Housing Secretary’s plans to reduce ground rent to a peppercorn rate for existing leaseholds has been watered down due to lobbying from investors and pension funds which own many of the freeholds. These have traditionally been seen as a safe way of providing a steady income over time for pension funds. Opponents of the legislation have also argued that it would make investing in freeholds less attractive in the future.
Following a consultation on ground rent which we covered in a previous article here, analysis by The Treasury found that the financial impact of reducing ground rents to a peppercorn rate would cost in the range of somewhere between £15bn and £40bn. Many freeholders had reacted to the consultation by stating that without having a regular income from ground rent, many of them may be forced to exit the market.
The ground rent cap alternative
A ground rent cap of £250 per year may not have been the preferred choice of campaigners for leasehold reform, however many will be encouraged by progress on this area. This will ensure that ground rent is capped at a more managed number than had often been occurring previously. Despite this, the 20 year period mentioned in the briefings to the press will have the air of scrapping ground rent completely being ‘kicked into the long grass’.
A spokesperson for the Department of Levelling Up, Housing and Communities has previously added: “It is not fair that many leaseholders face unregulated ground rents for no guaranteed service in return, and we remain committed to reducing ground rents to a peppercorn as set out in our 2019 manifesto.
“We recently consulted on a range of options to cap ground rents for existing residential leases, and we are carefully considering the responses before we make an announcement in due course.”
Solicitor’s thoughts
The backlash may be due to concerns that legislating to cap ground rents may expose the government to legal challenges, as it could conflict with the European Convention on Human Rights and English property ownership laws. The approach of disallowing something that was previously part of a contractual agreement is noted as a more direct method compared to past government actions involving asset expropriation through taxation. Depending on the outcome of the consultation, potential legal challenges may be predicted to be brought up.
What ground rent proposals were previously put forward?
A number of proposals were put forward in the consultation entitled Modern leasehold: restricting ground rent for existing leases. These include the following:
- setting ground rents at a peppercorn
- putting in place a maximum financial value which ground rents could never exceed
- capping ground rents at a percentage of the property value
- limiting ground rent in existing leases to the original amount when the lease was granted
- freezing ground rent at current levels
The Leasehold and Freehold Reform Bill is currently making its way through Parliament, and is currently at the committee stage in the House of Lords. There are an estimated 4.98 million leasehold properties in England according to the Department for Levelling Up, Housing and Communities. This makes up approximately 20% of the English housing stock overall.
Further communication about the exact proposal for ground rents under the Leasehold and Freehold Reform Bill is expected this week. This will confirm whether the proposed ground rent cap will indeed be introduced. Stay tuned and subscribe to our newsletter for further updates.
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