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Michael Gove’s plans to cap ground rents in England and Wales risks leaving the government open to a multibillion-pound compensation claim from institutional investors, a trade body has warned.
The UK levelling up secretary has said he is “immovable” in his determination to reform the system of leasehold property, which he has called “feudal”.
But investor groups and legal experts have warned that capping ground rents on existing leases at nominal, or so-called “peppercorn”, rates without compensation would amount to expropriation of assets.
In a letter sent to Gove this week, Mick Platt, director of the Residential Freehold Association, said: “Retrospectively capping or removing ground rents means destroying the legitimate investments of pension holders, charities and other institutions.”
Leasehold homeowners have the right to use their properties for a fixed period during which they pay ground rent to a freeholder. There are about 5mn leasehold homes in England, according to government statistics.
The RFA estimates that UK pension funds have more than £15bn invested in ground rents, which are considered a stable asset that deliver reliable returns over long timeframes, and that the total value of investment in ground rents exceeds £30bn. The government said the average ground rent was £298, based on a survey last year.
In November the government launched a consultation on proposals to limit the payments by leaseholders, which is due to end this month.
The proposals involved five options including reducing ground rents to “peppercorn” rates, freezing them at existing levels and capping them at a percentage of the property value.
“If government moves ahead with banning or capping ground rents, removing forecast financial income, it will wipe billions of pounds off the value of investments made by institutions on behalf of ordinary pension savers,” said Ian Fletcher, policy director at the British Property Federation, a trade body.
He added that a ban would be open to legal challenge and undermine the UK’s reputation as a place to invest.
Leaseholder campaign groups have called for more robust reforms, including banning leaseholds on new flats and doing more to aid people who wish to buy out their freeholds.
But the prospect of sweeping changes has proved disruptive among some institutional investors.
TIME:Freehold, a £200mn fund that invests in ground rents, suspended trading last month after its independent valuer flagged “material uncertainty” over the value of the fund’s asset as a “direct result” of the consultation.
The government’s statement that “we would not expect to compensate freeholders for lost revenue” had raised serious questions, according to legal experts.
Matthew Bonye, head of real estate dispute resolution at law firm Herbert Smith Freehills, said in a blog that, depending on the consultation’s outcome, the policy could amount to “expropriation, daylight robbery or somewhere in-between”.
He told the Financial Times that legislating to cap ground rents could leave the government legally exposed as it could clash with the European Convention on Human Rights and English common law principles guarding property ownership.
“Typically, in the past government expropriation of assets without compensation has been done more subtly, by way of taxation; but here there seems to be a more forthright approach where something that is part of a contractual bargain is simply disallowed,” he said.
The Department for Levelling Up, Housing and Communities said it would consider the consultation’s responses before taking a final position, but noted that pension funds held less than 1 per cent of assets in residential property.
It added that any hit to pension funds would be within normal investment and depreciation tolerances.
“We do not think it is fair that many leaseholders face unregulated ground rents for no guaranteed service in return — that is why we are consulting on a range of options to cap ground rents for existing leases,” the department said.