Michael Gove’s plans to cap ground rents in England and Wales could cost the taxpayer over £31bn, a trade body has warned.
The secretary of state has previously promised to tackle ground rent – the charge for renting out the land from the freeholder – as part of its upcoming leasehold and freehold reform bill.
This would be in the form of either capping or reducing ground rent payments.
In a letter written to Micheal 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.
“The only way of doing this and respecting human rights is by compensating these investors. Based on your department’s own figures, our analysis suggests this would cost the exchequer around £31bn.”
He added: “We would urge you to consider the impact that even considering these proposals is having and engaging with investors in a meaningful way.”
Platt said that the proposals will not only hit public finances, but will also drive professional freeholders from the market, creating “zombie buildings”, where there is no freeholder present.
The government’s data shows there are 4.98 million leasehold properties in England and Wales of which the government estimates 86 per cent pay a ground rent.
Using a typical valuation methodology, the present value of this investment is £31.9bn.
If the government retrospectively remove this contractual income, investors could be entitled to seek compensation from the government.
Platt added: “The government must respect the rights of property owners and ensure any leasehold reform is proportionate and delivers tangible benefits to leaseholders – from managing service charge levels to no new leasehold houses – instead of running a horse and cart through a huge area of investment in the UK economy.”
A spokesperson for the Department of Levelling Up, Housing and Communities, said: “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.
“British pension funds hold under one per cent of their assets in residential property and invest a broad portfolio of diversified assets in order to mitigate risks.
“We will consider the consultation’s responses before we confirm our final position.”