Capping ground rents is no way to help leaseholders
The government’s plans to reform leasehold will deter investment in property and leave flat owners to pay the bill for the building safety agenda, says Natalie Chambers
Governments in market economies are generally cautious about interfering in existing contracts, for good reason. Once that principle is weakened, confidence is difficult to restore. The draft Commonhold and Leasehold Reform Bill, and its proposed cap on ground rents, does exactly that, with serious implications that extend far beyond leasehold policy.
Ministers have described ground rents as “money for nothing”. It is an effective slogan, but it does not reflect how ground rents actually function. They are a form of rent, agreed contractually and factored into the price paid for a property at the point of purchase.
Institutional investors, predominantly linked to pension provision, are estimated to have invested £15bn in residential ground rents. These investments were made on the basis of lawful, binding contracts. Intervening retrospectively in agreements of this kind carries wider consequences. Markets can adapt to future regulation, but retrospective policymaking is rare in liberal democracies precisely because it corrodes investor trust.
The previous government’s own impact assessment previously warned that overriding established contracts could trigger compensation costs exceeding £27bn. At a time when the Treasury is already absorbing substantial liabilities – including from the Infected Blood scandal and the Chagos Islands settlement – creating further exposure on this scale is difficult to justify.
Furthermore, in many parts of England and Wales, non-UK-based landlords and buy-to-let investors make up the majority of leaseholders – exceeding 80 per cent in some areas. In practice, this risks transferring value away from long-term domestic pension investment towards wealthy overseas property investors, an outcome that sits uneasily with the stated aim of protecting homeowners.
It is no secret that there is a growing divergence within government on this issue. While the Ministry for Housing is pressing ahead, the Treasury has raised serious concerns about investor confidence and retrospective interference with legitimate contracts.
Hard to justify
What makes this intervention hardest to justify is how little it delivers for leaseholders while ignoring their biggest cost pressures. Service charges have risen sharply in recent years and are now the primary source of financial strain for many households. Capping ground rents does nothing to address this. By contrast, targeted reforms, such as regulating managing agents, improving transparency and raising professional standards, would deliver tangible benefits.
The consequences extend well beyond balance sheets. Capping ground rents risks pushing a significant number of professional freeholders into insolvency, with serious implications for the government’s building safety agenda. Freeholders play a central role in the remediation programme, which spans up to 12,000 buildings at a projected cost of £22.4bn, and can only meet their funding, insurance and legal obligations while they remain solvent. Those obligations are underpinned by income streams that the government’s draft Bill now proposes to strip away retrospectively, which will stall remediation and leave residents in unsafe buildings to shoulder responsibilities they neither sought nor are equipped to manage.
Scotland illustrates this risk. Since leasehold was effectively abolished in 2000, more than 50 per cent of apartments are now in a state of disrepair, driven by the fact repairs must be funded collectively by flat owners and often require unanimous consent
Scotland illustrates this risk. Since leasehold was effectively abolished in 2000, more than 50 per cent of apartments are now in a state of disrepair, driven by the fact repairs must be funded collectively by flat owners and often require unanimous consent. In buildings with high levels of buy-to-let ownership, where many owners do not live on site, agreement is harder still – leading to delay and, in many cases, legal action between neighbours simply to carry out basic maintenance.
This is not a question of whether leasehold should be reformed. It should. But retrospectively rewriting contracts for marginal gains is wrong, particularly when the real pressures facing leaseholders remain untouched. Governments earn trust by being predictable. Markets invest where the rules are clear and stable. By choosing blunt intervention over targeted reform, this draft Bill will damage both.
Natalie Chambers is Director of the Residential Freehold Association