Update: Fri 17 May 2024. This news story has been amended after incorrectly stating leaseholders would be in line for compensation. We apologise for the inconvenience caused.
This bill could have a “significant negative financial impact on public finances” as well as provide the next Government with a “legal headache”, according to the Residential Freehold Association (RFA).
The organisation, which represents residential property investors, said this “colossal sum” is on a “similar scale to the net public cost of the interventions made during the 2008 banking crisis”.
It added that the Government’s plan to cap ground rent would result in professional freeholders going insolvent due to their income stream being reduced.
This would then have the knock-on effect of leaving residents to assume the legal and financial liabilities for managing and maintaining a building.
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As a consequence of widespread insolvency, the RFA warned building safety works would “grind to a halt”, homes would fall into disrepair, insurance policies would be cancelled, and flat sales would collapse as lenders refuse to provide finance.
Ground rent reforms
The organisation has written to the Office for Budget Responsibility (OBR) – given its role in evaluating fiscal risks – to notify it of the potential financial impact of the reforms.
The proposal to cap ground rents for existing leaseholders has been put forward by the Department for Levelling Up, Housing and Communities (DLUHC) as part of the Leasehold and Freehold Reform Bill.
It initially proposed that ground rent would be reduced to a nominal peppercorn value, but recent rumours suggest this could be capped at £250 per year at first and lowered to a peppercorn fee after some years.
In the letter to Richard Hughes, chair of the OBR, Mick Platt, director of the RFA, wrote: “For the avoidance of doubt, every proposal in the consultation would interfere with the property rights of investors who receive this income as a result of their prudent and lawful investments – investors such as pensioners, charities and other major institutional investors.
“As the proposals would also fundamentally rewrite and alter millions of long-term standard leasehold contracts relied upon by these investors, it is hard to see – if they are enacted – how the UK residential property sector could retain any investor confidence moving forward.”
Service charge a bigger issue than ground rent
The RFA said an independent poll commissioned by the organisation found that 19% of people thought it was more important to regulate ground rent. But more than double (43%) said service charges needed to be regulated.
The RFA suggested this meant the bill was not addressing the concerns of the public, as there are currently no proposals relating to service charges.
Meanwhile, Government data showed that the average ground rent paid by leaseholders in England and Wales was £298 per year and is “at historically low levels”.
However, the average service charge stood at £3,634 and had increased by 41% in the last five years.
Further, a review from the Property Ombudsman showed leaseholders’ complaints were mostly regarding service charge, with no reference to ground rent.
Research from the Government also supported this, showing that although most people felt positive or neutral about the leasehold system, most were concerned about the regulation of the service charge.
‘Pushing proposals the public don’t want’
Platt added: “Mr Gove’s plans will leave the next Government with a colossal bill and a legal headache. It’s only right that we highlight this while Parliament still has [a] chance to change course.
“Furthermore, instead of delivering reforms that could genuinely improve standards in the leasehold sector – such as regulating service charge – the Government is pushing proposals [that] the public do not want.
“As it stands, the Government’s policy will not only do little to improve standards for leaseholders, but it will also have a significant impact on the state of public finances, which will inevitably be picked up by the taxpayer.
“The Government must reconsider the bill and prioritise proposals [that] will make a tangible difference to the lives of 4.9 million leaseholders across England and Wales.”
The Leasehold and Freehold Reform Bill is currently making its way through the House of Lords, with the report stage set for 5 June.
