Leasehold and Freehold Reform Bill is unfair in its current form
The government’s Leasehold and Freehold Reform Bill had its second reading on 11 December 2023, with the process occurring concurrently with a consultation on restricting ground rents for existing leases, which closed on 17t January. MPs are currently questioning witnesses and debating at the committee stage of the Bill.
Today, campaign group the Pensioners for Ground Rent Association announces its opposition to aspects of the Bill, and calls for the government to urgently confirm that compensation for the capping of ground rents will continue to be included in the Bill.
Steve Whybrow, spokesperson at the Pensioners for Ground Rent Association, said: “Firstly, it’s important to make clear that we welcome any balanced legislation that aims to protect the consumer, and there are many aspects of this Bill that will provide greater protection to leaseholders.
“However, even though the draft Bill currently includes a compensation provision, the consultation contradicts this and suggests (under Option 1) the capping of ground rents to a peppercorn without compensation. Indeed, the minister statedduring the second reading of the Bill on 11 Dec 2023, “I cannot pre-empt the consultation, but in a way I already have… my favoured approach would be, and I believe that it should be a peppercorn.”
“Our members are therefore hugely concerned that this approach opens a ‘back door’ for the government to expropriate their pensions as a giveaway to curry favour with voters in an election year. That is why our association has been formed.
Beyond the existential threat to freeholders by the removal of rent (as well as marriage value in lease extensions), there are a large number of serious shortcomings to the Bill. If passed, these would lead to hugely damaging consequences for freeholders, investors and – crucially – leaseholders themselves and the wider British public.”
Average ground rents are lower than claimed by the government
“The Bill is targeting the miniscule number of ground rents (0.1% of the total in England and Wales) where housing developers and their solicitors created leases where ground rents doubled every ten years. This was a brief aberration of the market in the mid-2000s and we are pleased that the CMA have all but resolved this situation. The consultation offers various options of how to remedy the small number of these type of properties where these increases remain; we are therefore puzzled as to why this has been extended to target all existing rents.
“Further, the government states in the consultation that the average ground rent is £298 annually per property taken from Annex Table 2.7 of the 2021-2022 English Housing survey. However, from this same survey the median figure gives the average as £100 annually. The data was taken from a sample of 396 leases in a population size of approximately 4,980,000 and that 20% of the sample were London rents, thus the £298 mean figure has allowed a small number of London flats to completely skew the data. The vast majority of our member portfolios report a rent per property of less than £100 per annum. We therefore consider that the inclusion of high-value London properties, in a survey sample that is far too small to have statistical significance, has vastly inflated the impression of the amount of ground rent paid by most people across this country.
“With this in mind, we consider that deleting all ground rents is an excessive overreaction and undermines the rule of law in this country. Proportionate legislation needs to ensure that people who bought low ground rents in good faith are not expropriated to make up for excessive rent reviews.
Legislation Is muddled and rushed
Whybrow added: “Further, the Bill has been launched concurrently with the consultation (which has only recently closed) on capping contractually committed ground rents. This overlap undermines due process for legislators to properly examine the bill.”
Pensioners who invested with leading insurance companies and other investors would be decimated by company insolvencies
Whybrow: “Beyond our members, we are aware that large pension funds in this country have invested on behalf of huge numbers of people in pension assets that rely on income from ground rents. This is one of the most concerning elements of this potential aspect of the Bill, as passing it into law would lead to an immediate loss of over £32.7bn for businesses and individuals who have invested in good faith for decades in the freehold sector.
“This would inevitably create a sudden wave of insolvencies, leaving our members in ruins as well as denting other pensioners in these large pension funds, depending on what percentage of their pension is invested. This isn’t a case of hugely wealthy landowners being given a bloody nose: it’s the very livelihoods of vast numbers of ordinary people – who have worked hard to build towards a comfortable retirement – being put to the sword. Without any compensation scheme proposed, this surely cannot be considered fair.”
A violation of contract law and ECHR provisions
Whybrow: “Investors in freeholds entered into these arrangements in the knowledge that the terms of the leases, agreed by the contracting parties after taking legal advice, were within the scope and jurisdiction of UK law. Ripping up these agreements by way of a single act of parliament would irreversibly damage the UK’s reputation for honouring contract law, set an alarming precedent for the future, and undermine the reliability of the whole UK economy as investable.
“The Bill is also incompatible with the fundamental principles of the European Convention on Human Rights, which stipulates that every person is entitled to the peaceful enjoyment of their possessions, and should not be illegally deprived of them. Should the Bill be passed in its current (and proposed) form, the resulting situation would be tantamount to expropriation of freeholder and investor assets.
This would surely lead to a deluge of litigation against the government, the cost of which – covering both legal defence and compensation – would be borne by the taxpayer. The UK’s reputation for honouring contract law would be irreparably damaged, potentially leading to a market meltdown similar to the debacle that led to the change of prime minister in 2022.
Disappearance of freeholders would compromise safe building management
Whybrow: “There are many areas in which freeholders deliver value for the leaseholders in their properties. These include funding and arranging property management, repairs and insurance premiums; improvements to facilities (such as the installation of faster broadband, solar panels and car charging points); working with local authorities to deal with issues such as fire safety; and representing leaseholders in land disputes with neighbouring properties. Most of these services are typically supplied at no additional cost to the leaseholder beyond the ground rent.
“These service provisions would likely disappear if the Bill is passed and freeholder companies become insolvent, leading to a sudden vacuum where leaseholders are left to fend for themselves without any clear legal basis. This creates a very real possibility of buildings becoming unsafe and/or uninsured, with residents being forced to deal with the myriad challenges of building management, whether they wish to or not. Reliance on currently unregulated managing agents opens opportunity for management costs to rise.
Reform is always welcome, but must always be proportionate
Whybrow: “We support every effort to ensure a balanced relationship between freeholders and leaseholders. Leaseholders have the right to enjoy their homes without being saddled with exorbitant ground rents or charges while those investing their pension assets in freeholds also have the right to see their retirement funds protected.
“This Bill, however, would fail to achieve this balance. In its present form, freeholders would face financial ruin, leaseholders would lose vital building management provision, and the general public would end up covering the costs of the inevitable human rights and compensation battles with the government.
It is entirely illogical to squeeze freeholders to a point of insolvency when reasonable compensation would assist the eventual transition to a new-style ‘commonhold type’ of ownership in an orderly and coherent manner. Otherwise, flats with insolvent freeholders will likely become unsalable and unmortgageable.
“We urge the government to rethink its position on this Bill, and to come to the table, listen to expert evidence from both sides and to negotiate a sensible middle ground that meets the needs of all stakeholders.”
