Last month, the Sunday Times ran a headline claiming that Gove’s plans for Leasehold reform were facing the axe: Leasehold dream over as Gove plan quietly crumbles and there has been further comment since.
Mark Chick, Bishop & Sewell’s Senior Partner, considers the details behind the headlines – and what might be next.
A version of this article was first published on Mark’s blog: Leasehold Reform News.
The Times / Sunday Times does have a good record of being an unofficial / official source of these things – after all that is where details of the Leasehold and Freehold Reform Bill first appeared in November 2023.
If this is right – and the sector has had a lot to say about it in the past few days – then it may well be that the recommended outcome of the DLUHC consultation on ground rent may not be the banning of ground rent for all existing leases. Of course, we have since had the Bill’s third reading in the Lords – and a raft of further headlines.
But headlines aside, is this, actually, a surprise and what could be next? After all a total ban was only one of the options for reform on which the Consultation sought views.
To many commentators this won’t have come as that much of a surprise given the noted potential issues with the possible need to pay compensation which have been highlighted by various human rights experts; there is also the question of interference in existing contracts.
A number of Human Rights experts have expressed views on this. Among these is Douglas Maxwell of Henderson Chambers. In his report to the All-Party Parliamentary Group on Leasehold Reform (‘the APPG’) in November 2023, he expressed a preliminary view that the capping of ground rent in existing leases to a peppercorn would ‘more likely than not’ constitute a breach of Article 1 Protocol 1 of the European Convention on Human Rights. Were this to be the case then if a total a ban was to be brought into force, it is very likely that the Government would have to pay compensation to all affected freeholders. Estimates as to the size and value of existing ground rents vary, but the Government’s own impact assessment puts the figure at £27.3BN, a not insubstantial sum. This may explain the Treasury’s rumoured reluctance to sanction a total ban on existing ground rents.
Aside from some of the more political comments that have been made and will continue to be made (the prospect of a ban on existing ground rents was a manifesto pledge by the Conservatives), there has of course been some progress in this area. Since 30th June 2022 there has been a total ban on ground rent for all new leases following the Leasehold Reform (Ground Rent) Act 2022.
What the current discussion in the press and via the ‘rumour mill’ does not make clear is which of the other options for reform are still on the table – don’t forget the consultation mentioned a 0.1 % (or higher cap), a freeze, as well as the option of a cap at £250 for all current ground rent. Mr Gove’s team are still lobbying for the £250 cap apparently.
A ground rent cap at £250 would be a big step forward for all leaseholders – and would also reduce the value of freeholds where the ground rent exceeds this level. It would of course reduce the amount that would have to be paid to buy out the ground rent when buying the freehold or extending the lease. Whether government feels this can be delivered without the risk of a challenge on human rights grounds remains to be seen. The thinking there would be that anything other than outright deprivation might be sufficient to escape a subsequent challenge. There are of course the other options that are on the table, such as a freeze or a cap at a fraction of the capital value of the property. When comparing what has happened in other ‘comparable’ jurisdictions (Norway) in a similar type of compensation case, the cap at a fraction of market value found favour and did not offend the Human Rights legislation.
One thing that I am not clear about personally is why one of the options for reform as not a more surgical strike on ‘bad’ ground rents (the high doubling rents, or the ones like the example that the Times article mentions) – and to seek to deal with these alone as a first step.
There are other possible options too – like a phased-in ban or reduction, which, crucially, would give the market time to adjust. These were not mentioned in the Consultation but were among the suggestions made by respondents.
What the official outcome of the Consultation will be, we do not yet know – but it does seem that an outright ban may not be on the cards. The question then is what recommendations will the Consultation make? Betting money might be on a cap at a fraction of capital value – especially given that the draft bill uses a 0.1% cap in its valuation model. However, we will have to wait and see … As they say, watch this space.
Mark Chick
Bishop & Sewell
Senior Partner | Joint Head Landlord & Tenant
If you have a query concerning leasehold property, then please contact Bishop & Sewell’s expert Landlord & Tenant team by emailing [email protected]
The above is accurate as of 02 April 2024.
