Leasehold reforms making their way through parliament may subject the next government to a “colossal” £30bn black hole if passed, according to the Residential Freehold Association.
The freeholders trade body has written the UK’s finances watchdog, the Office for Budget Responsibility, to warn that the Bill’s plans to cap ground rent and regulate service charges could leave the government open to huge compensation claims.
It says the moves “would fundamentally rewrite millions of long-term standard leasehold contracts relied upon by investors such as pensioners, charities and other major institutions”.
This would “inevitably” lead to a legal challenge under Article 1 of Protocol 1 of the European Convention on Human Rights, the association says.
The Leasehold and Freehold Reform Bill, introduced last November by housing secretary Michael Gove, plans to boost the rights of people who live in the 4.77 million leasehold homes in England, which accounts for 19% of the nation’s housing stock.
Leaseholders own the right to occupy their homes, but the building or land is owned by a freeholder landlord.
Some are trapped by onerous ground rents that are either double, or increasing in line with inflation, costing them thousands a year.
Other leaseholder have to pay service charges, but have little say over maintenance work carried out in and around their homes.
The average service charge leaseholders pay managing agents is £3,634 a year, a 41% over the last five years. The average ground rent leaseholders pay landlords in England and Wales is £298 annually, according to official data.
Gove has called the leasehold system a “feudal system that needs to go”.
The Bill is at the committee stage in the House of Lords.
But Residential Freehold Association director Mick Platt says: “Mr Gove’s plans will leave the next government with a colossal bill and a legal headache.
“It’s only right that we highlight this while parliament still has a chance to change course.
“As it stands, the government’s policy will not only do little to improve standards for leaseholders, but it will also have a significant impact on the state of public finances, which will inevitably be picked up by the taxpayer.”
Last month, reports suggested that annual charges levied on leaseholders will be capped at £250 a year rather than being cut to zero, or “peppercorn” rate, after Gove was forced to water down his legislation by the Treasury.
Treasury analysis is reported to show the government could be open to compensation claims as high as £37bn from insurance funds that have invested heavily in ground-rent portfolios.
