A trade group has cautioned that Michael Gove’s proposal to limit ground rentals in England and Wales may expose the government to multi-billion pound compensation claims from institutional investors.
The UK’s levelling up minister has stated that he is “immovable”, in his determination to change the leasehold system, which he called “feudal”.
Investor groups and legal experts have warned against capping ground rents for existing leases to nominal rates, or “peppercorn” rates, without compensation. This would be tantamount to expropriation.
Mick Platt from the Residential Freehold Association sent a letter to the Governor this week. He stated that removing or putting a limit on ground rents now would harm the investments of pensioners, charities, and other institutions.
Leasehold owners have the right of use for a set period and pay a ground rent to their freeholder. According to government statistics, there are approximately 5 million leasehold properties in England.
UK pension funds invested over £15bn in ground rentals, which are considered stable investments with reliable returns over a long period.The total value in ground rents investments exceeds £30bn. According to a government survey conducted last year, the average ground rent in the UK was £298.
The government began a Consultation in November on proposals for leaseholders to limit their payments. This consultation is set to conclude this month.
Five options were presented, including freezing ground rents at current levels or capping them to a percentage.
Banning or capping ground rents without considering future financial income would greatly reduce the value of investments made by institutions for pension savers.This was said by Ian Fletcher of the British Property Federation.
He said that a legal challenge could be brought against a ban, and it would damage the UK’s reputation for being a good place to invest.
The leaseholders’ campaign has called for more radical reforms. They want to ban leaseholds for new flats and provide more help for people who want to purchase their freeholds.
Some institutional investors have been spooked by the prospect of major changes.
The Freehold ground rent fund, worth 200 million pounds, has temporarily stopped trading because an independent valuer has expressed concerns about its asset value due to a consultation.
Legal experts have raised serious concerns about the government’s statement “we wouldn’t expect to compensate freeholders” for lost revenue.
According to Matthew Bonye, a real estate dispute resolution expert at law firm Herbert Smith Freehills, the government’s policy could be seen as a form of expropriation or theft, depending on the outcome of the consultation.He said that limiting ground rents would expose the government to legal liability, as it would conflict with European Convention on Human Rights principles and English common law principles protecting property ownership.
He said that, “typically, government expropriation without compensation was done subtly in the past, through taxation. However, there seems to be a simpler way to handle this issue. We can prohibit something that is included in a contract.
The Department for Levelling Up, Housing and Communities will review the consultation responses before making a decision. They mentioned that pension funds own less than 1% of residential property assets.
The statement added that the pension funds will not be affected by any losses due to normal depreciation and investment.
The department said it is unfair for leaseholders to pay unregulated rents without getting any service guarantee in return.That is why they are consulting with a variety of options for capping ground rents on existing leases.