Ground Rents to be capped at £250 per year…
Leaseholders who pay ground rents are to have their levy capped at a maximum amount of £250 as Gove is forced to water down his radical proposals for leasehold reform. Instead of abolishing the payments altogether, as Gove wished, leaseholders under the new plan will continue to pay ground rents as they are phased out over a 20-year period.
That’s the outcome of a battle between Michael Gove’s mission to overhaul the leasehold legislation and the Treasury, which was facing a backlash against the move from powerful economic forces, including large pension funds and insurance companies holding the fortunes of millions of pensioners and policyholders in their hands.
The decision, which according to the Sunday Times will be announced this week, comes after a power battle between the two branches of government – Gove’s Department of Levelling up and the Treasury - and Rishi Sunak’s ruling, which effectively waters down the radical proposals as a compromise to both sides of the argument.
Previously Michael Gove, who is Secretary of State for Levelling Up, Housing and Communities and Minister for Intergovernmental Relations, had said that the leasehold system needed to be scrapped altogether as it was a “feudal system that needs to go”.
Millions of leaseholders in England and Wales
There are said to be around ten million people living under the leasehold system in England and Wales. They are effectively tenants in their own homes, having bought into the economic value of their home but having no title to the land on which it rests. What’s more, their ownership is limited to the length of the lease, so is of diminishing value until the lease is extended to limit this erosion.
In some cases, the annual ground rents payable under leases are set to increase by means of a formula which results in them reaching onerous levels over time, at commitments such that any would-be purchaser is put off buying and therefore these leaseholders are trapped in their homes.
With some ground rents doubling every x number of years, and coupled with inflation beating service charges, it means some leaseholders are facing real hardship and even bankruptcy, especially those who are also faced with living in blocks with cladding issues.
While the compromise position gives a partial victory to Michael Gove’s plans, the prime minister, it seems, has seen the sense in the Treasury’s argument as well and imposed his will on the settlement. While Gove wanted a zero or “peppercorn” rate for ground rents, the £250 cap should be affordable for all leaseholders, while maintaining a continued cash-flow for the pension funds whilst they adjust to a gradually reduced benefit.
A sudden cliff-edge removal of ground rent revenue would have thrown some pension funds and insurance companies into turmoil having invested heavily in the freeholds of properties into what was regarded as a reliable and minimal risk income stream.
Treasury research has established that around £37 billion of investment could have been wiped out as far as income producing assets are concerned, which would have been disastrous for individual pensions and the insurance industries.
Freeholds are a traditional safe investment vehicle for pensions funds and insurance companies
Pension funds have traditionally invested in properties producing ground rents because they are stable investments that help support people’s pension pots, providing a steady income over time.
The Government’s proposals within the Leasehold and Freehold Reform Bill and the consultation that goes with it, would reduce the value of ground rents, potentially to zero, wiping £billions off those pension funds have invested in them. In some cases, it would mean that individual pension-holders would stand to lose the tens of thousands of pounds they have saved over the years for their retirements.
There is a strong argument to say that the Bill’s proposals represent an unprecedented abuse of property rights – effectively amending contracts retrospectively. By doing this the Government would be plundering pensioner’s savings and passing on the value to leaseholders. Some of these are wealthy individuals and other parties, many of whom are wealthy buy-to-let investors.
The move, if implemented as reported, will make investing in freeholds less attractive in the future. It will certainly help those leaseholders who are struggling to pay high ground rents, or unable to sell their properties, but the downside is, it will make extending the lease or buying the freehold more expensive for the leaseholder. That’s because they will have to compensate the freeholder for its lost income.
If ground rents were removed, reduced to zero as the Bill is currently drafted, the pension fund and insurance company investors and other professional freeholders would be forced into liquidation and they would be moved out of the residential property market.
Removing these professional freeholders in the many large and complex apartment buildings that exist, especially in the capital, would have serious consequences for the leaseholders. In some cases it would make it impossible for them to sell or obtain mortgage finance, as there would be counterparty.
The result would likely be the freeholds being acquired by speculative investors with short-term interests, looking to make a quick profit. It would otherwise leave leaseholders having to take on the responsibility of running their own blocks which brings challenges of its own.
Leaseholders would be left wondering who would take responsibility for repairs, how will disputes be handled when fellow leaseholders get difficult and won’t agree to paying bills, who will arrange the insurance cover to make sure it’s safe, comprehensive and affordable, and who will manage the estate and handle the maintenance and upkeep of the building, especially when everyone is working full-time?
These administrative and legal burdens become tiresome and divisive and often lead to bad relations among neighbours, service charges will still be necessary regardless of who runs the building, otherwise there is a good chance the buildings will fall into disrepair, building safety will suffer and the value of the individual leaseholder’s investments will be affected negatively.
Initially, it seems, the Treasury strongly opposed this cap, but it was overruled by prime minister Sunak whose intervention reached a compromise. According to the Sunday Times, details are now being finalised over the weekend after Downing Street made clear the prime minister is in favour of both the cap and the transition period through “a process known as “write-round”, which happens when a policy is about to be formalised.”
It gives the Tories the ability to argue that the package meets the 2019 election manifesto commitment, which promised to reduce ground rents to a peppercorn rate, without specifying by when.
“The PM has said we need to live up to our manifesto commitments,” a senior government source told the Sunday Times: “It was never going to be the full fat option, but fundamentally he [Gove] is going to get what he wanted.”
To be incorporated through an amendment to the Leasehold and Freehold Reform Bill, currently making its way through Parliament, a spokesman for the Department for Levelling Up, Communities and Housing has said:
“As set out in our 2019 manifesto, we are committed to reducing ground rents to a peppercorn, and we have already legislated to remove ground rents for new residential leases.
“We recently consulted on a range of options to cap ground rents for existing residential leases and we are carefully considering the responses. We will make an announcement in due course.”
Harry Scoffin, founder of the anti-leasehold campaign group Free Leaseholders, told the Sunday Times:
“If these reports are true and there will be an immediate £250 cap with a phase-out, the Government has sided with voters and homeowners rather than rent-seekers and middlemen. The move will go some way to restore faith in democratic capitalism.
“However, the government must press home the advantage and beef up the bill to honour the Conservatives’ 2019 manifesto, which pledged no more new leaseholds, including flats.”
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