Residential property investors, represented by the Residential Freehold Association (RFA), have written to the Chair of the Office for Budget Responsibility (OBR) to warn that the Government’s leasehold reform proposals to retrospectively cap residential ground rent could expose public finances to a potential compensation bill of up to £30 billion, due to the interference with the legitimate property rights of investors.
Given the OBR’s role in evaluating fiscal risks, the RFA have written to its Chair Richard Hughes to notify him of the potentially “colossal” black hole that could face the next Government, if proposals floated by DLUHC Secretary Michael Gove get the green light.
The warning comes as new independent polling from JL Partners, commissioned by the RFA, shows just 19 per cent of the public believe it is more important to regulate ground rent, compared to 43 per cent who favour the regulation of service charges – casting further doubt on the logic behind the Leasehold and Freehold Reform Bill, which does nothing to address service charge.
Alongside the Bill, the Government is set to announce its response to its consultation on capping ground rents, which would fundamentally rewrite millions of long-term standard leasehold contracts relied upon by investors such as pensioners, charities and other major institutions. In the letter to the OBR, investors warn this would represent unprecedented transfer of wealth and will inevitably be subject to a legal challenge under Article 1 of Protocol 1 of the European Convention on Human Rights.
The findings corroborate the Property Ombudsman’s most recent review which highlights most complaints from leaseholders centre around the issue of service charge, with no reference made to ground rent in its analysis of the complaints. This is supplemented by the Government’s own research published last year, which shows although most people hold a positive or neutral view of the leasehold system, a vast majority of concerns centred around the lack of service charge regulation, suggesting the issue of ground rent is non-existent in comparison.
According to official Government data, the average ground rent leaseholders pay to their landlord in England and Wales is £298 per annum and is at historically low levels. In comparison, the average service charge leaseholders pay to their managing agent is £3,634, having increased by 41% in the last five years to its highest levels.
Mick Platt, Director of the RFA, said:
“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 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 which 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 which will make a tangible difference to the lives of 4.9mn leaseholders across England and Wales.”
The Government’s plans to cap ground rent would result professional freeholders going insolvent due to their income stream being reduced (in some proposals, to zero) – leaving residents to assume the legal and financial liabilities for managing and maintaining a building. The RFA warn that as widespread insolvency materialises, 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 will refuse to provide finance.
The Leasehold and Freehold Reform Bill is currently making its way through the House of Lords, with Report Stage set for 5th June.
