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Leasehold ground rent cap could invoke £30bn compensation bill – RFA

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  • 15/05/2024
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Leasehold ground rent cap could invoke £30bn compensation bill – RFA
The Residential Freehold Association (RFA), an organisation representing residential property investors, has said the proposal to retrospectively cap ground rent could lead to a potential compensation bill of up to £30bn.

The association wrote to Richard Hughes, chair of the Office for Budget Responsibility (OBR), to warn that this policy would interfere with the rights of property investors and lead to a “colossal black hole”. 

The proposal to cap ground rents for existing leaseholders has been put forward as part of the Leasehold and Freehold Reform Bill. It was initially proposed that ground rent would be reduced to a nominal peppercorn value, but it has since been rumoured that this could be capped at £250 per year at first and lowered to a peppercorn fee after some years.

 

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, compared to 43% who said service charges needed to be regulated. The RFA suggested this meant the bill was not addressing the concerns of the public, as it does not have any proposals relating to service charge. 

It also said government data showed that the average ground rent paid by leaseholders in England and Wales was £298 per year and “at historically low levels”, while 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 and no reference to ground rent was found in its analysis. 

Research from the government also supported this, which showed although most people felt positive or neutral about the leasehold system, most were concerned about the regulation of service charge. 

 

Impact on freeholders and flat sales 

The RFA said millions of long-term standard leasehold contracts were relied on by investors such as pensioners, charities and other institutions. It said the proposal would “represent unprecedented transfer of wealth” and be “subject to a legal challenge under Article 1 of Protocol 1 of the European Convention on Human Rights”. 

The proposal to introduce peppercorn ground rent could result in some freeholders seeing their income reduced to zero, and leave residents to take on legal and financial liabilities for the building. 

The RFA said this could make professional freeholders insolvent, and if this happened, building safety works would stop, insurance policies would be cancelled and housing quality would suffer. The association said this could also impact flat sales, as some lenders may refuse to provide finance on these homes. 

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 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. 

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