MPs have laid into freeholders for creating a “rentier structure” in England and Wales in recent years, charging “exorbitant” ground rents of £8,000 a year in some cases, as a freeholder group pushed back against proposed changes to leasehold laws.
The government’s long-awaited leasehold reform bill, which would make it easier and cheaper for leaseholders to extend their lease and buy the freehold, and will ban leaseholds on newly built houses – but not flats – in England and Wales, is at the committee scrutiny stage.
MPs on the public bill committee questioned representatives of leaseholder and freeholder groups as well as legal experts and executives from the Competition and Markets Authority on Thursday before publishing their findings on 1 February.
The hearing became lively when Jack Spearman, head of leasehold at the Residential Freehold Association, which represents freeholders for 1m leasehold apartments, pushed back against proposals from the housing secretary, Michael Gove, to cap ground rents on existing leases, with a preferred option of reducing them to a peppercorn level – in effect zero. This is not part of the bill but the subject of a government consultation that closed on Wednesday.
Spearman said such a cap would put investors off, and pointed to a recent report from Savills that the UK needed £250bn of investment to meet housing demand within the next seven years. “The general living sector and building houses in this country needs capital. It needs to come from somewhere,” he told MPs. “Where’s that going to come from? It’s going to come from pension funds. So it is unfortunately sending the wrong signal.”
The Labour MP Barry Gardiner, who is working on a documentary on the leasehold system, called the idea that the housing market would collapse without the ability of pension funds to extract revenue from ground rents “a nonsense”.
“Freeholders have over the past 15 years created a rentier structure where they can extract revenues from the ground rent that are exorbitant, in some cases £8,000 a year for no service,” he said.
The Department for Levelling Up, Housing and Communities said less than 1% of pension fund assets were invested in residential property.
Spearman said that “where ground rents are onerous and where they are egregious, it’s hard to say there isn’t an argument for legislating to deal with those onerous ground rents”, but for ground rents that are not doubling frequently down the years “that’s slightly harder”.
The government was spurred to act on leaseholds after a scandal over exorbitant ground rents, some of which doubled every 10 years, and in 2019 asked the Competition and Markets Authority to investigate unfair practices.
The regulator helped about 20,000 leaseholders seek redress from developers and freeholders and ground rent for new leases was abolished in the summer of 2022. However, there are still a “significant” number of leaseholders whose ground rents will rise sharply in coming years, according to the housing department.
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The peppercorn cap would save leaseholders £5.1bn in ground rent over 10 years, the government estimates. With 4.5 million leaseholders – 86% of all leaseholders – in England and Wales who report paying ground rent, the average saving would amount to £1,136, it said. However, the savings would be bigger in London, where ground rents tend to be much higher.
Freeholders would also face a £27.3bn loss in asset values if ground rents were reduced to zero, resulting in a total hit of £32.4bn, the government estimates.
The government has said that no compensation will be paid to freeholders for capping ground rents. The British Property Federation has said this would be open to legal challenge because pension funds would have to take action on behalf of their beneficiaries.
Spearman said: “That’s probably not going to be compliant with the ECHR [European court of human rights]. So compensation is going to have to be paid and it’s either paid by the taxpayer or it’s paid by the leaseholder.”
