The Cost of Leasehold Reform

Last month, the Department for Levelling Up, Housing, and Communities initiated a six-week consultation on proposals aimed at capping ground rent in existing leases. This move is distinct from The Leasehold Reform (Ground Rent) Act 2022, which already prohibited ground rent on new leases (a topic we previously covered).

The five options under consideration:

1. capping ground rent at a peppercorn rate;
2. capping ground rent at an absolute maximum value;
3. capping ground rent at a percentage of the property value;
4. capping ground rent at the original amount it was when the lease was granted; or
5. freezing ground rent at current levels.

Government’s Rationale

The preamble to the consultation underscores that the existing form of ground rent charges impedes the government’s commitment to a fairer and more transparent homeownership model. The Competition and Market Authority supports this, asserting that the justification for ground rent is, at best, limited, advocating for legislative intervention.

Potential Financial Implications

However, reports now suggest that the Government’s proposal to cap ground rent might incur over £31 billion in compensation claims from institutional investors. If accurate, this cost would be akin to a 1% income tax rise for the next five years, despite income tax rates remaining largely unchanged since 2008.

Analysis by the Residential Freehold Association (RFA)

The Residential Freehold Association (RFA), representing the UK’s largest professional freeholders, projects this cost based on theoretical claims for the loss of ground rent from investors, including pension holders, charities, and private companies. The RFA contends that these proposals could not only impact public finances but also drive professional freeholders from the market, potentially resulting in ‘zombie buildings’ without a present freeholder.

Regardless of the true cost of reform, it is imperative that as many people as possible respond to the consultation before its closure on 17th January 2024.

How Pinney Talfourd can help

Pinney Talfourd are experts in commercial and residential property litigation and can advise you on changes to the law so you are given up to date advice.

Please do not hesitate to contact Oliver-James Topping on 01708 463227 should you wish to discuss anything further.