Unlock the Editor’s Digest for free: Michael Gove’s Ground Rent Plans Risk Legal Battle

In a bold move to reform the leasehold property system in England and Wales, Michael Gove’s plans to cap ground rents have sparked controversy and warnings of potential legal challenges from institutional investors. The UK levelling up secretary has been firm in his stance that the current system is “feudal” and in need of change.

However, investor groups and legal experts have raised concerns that capping ground rents without compensation could amount to expropriation of assets, leaving pension holders, charities, and other institutions at risk of losing billions of pounds in investments. The Residential Freehold Association has warned that retrospectively capping or removing ground rents would destroy legitimate investments and harm pension savers.

With approximately 5 million leasehold homes in England, the government’s consultation on proposals to limit ground rent payments has caused a stir in the industry. The options on the table include reducing ground rents to nominal rates, freezing them at current levels, or capping them as a percentage of property value.

Ian Fletcher, policy director at the British Property Federation, has cautioned that banning or capping ground rents could have significant financial implications and undermine the UK’s reputation as an investment destination. Leaseholder campaign groups are calling for more robust reforms, including banning leaseholds on new flats and assisting those who wish to buy out their freeholds.

The uncertainty surrounding the government’s stance on compensating freeholders for lost revenue has led to disruptions in the market, with some funds suspending trading due to valuation concerns. Legal experts have highlighted the potential legal challenges that could arise from the proposed changes, citing conflicts with property ownership principles and human rights laws.

As the Department for Levelling Up, Housing and Communities considers the consultation responses, the future of ground rent regulation remains uncertain. While the government aims to protect leaseholders from unregulated ground rents, the potential impact on pension funds and institutional investors is a key concern. The final decision on ground rent caps will have far-reaching implications for the property market and investment landscape in England and Wales.