Gove’s naïve plans for leasehold reform will only exacerbate UK’s housing crisis

In January 2024, Mick Platt, Director of the RFA, wrote a piece in Property Industry Eye arguing the Government’s leasehold reform proposals will only worsen the UK’s housing crisis. The piece can be read here.

As first-time buyers fall to the lowest level in a decade, Michael Gove continues to show what a slim grasp he has on economics, investment and the current housing crisis, by threatening to plunge the residential property sector into further crisis. His proposed reforms to ground rent payments to building owners will no doubt strike him as a pre-election vote winner, but the reality is far more complex.

When people buy a leasehold flat, they sign a contract agreeing to pay their fair share of the upkeep (service charges) and in many cases a ground rent (at an average cost of £298 a year according to the Government’s own data. The latter has been whipped up by the Housing Secretary as an unfair payment in return for nothing (which of course it is not), and he has decided that this is something worth tackling.

The government has already banned ground rents on new leases, but Mr Gove now wants to go further and ban ground rents on current leases. The government’s own research suggests this will cost the pension industry, the biggest investor in ground rents, £27.3bn. His response? “The pension industry can invest that money elsewhere”. He seems to forget that once he has rendered those investments valueless, it’s rather hard to sell them to anyone else and get your money back. Indeed, some property funds have already suspended trading.

So, perhaps unsurprisingly, the industry is likely to take the government to court over the “smash-and-grab” raid – and if they win the taxpayer will be paying back the £27.3bn. More broadly, industry experts (including the ex-chancellor Phillip Hammond) are desperately courting the pensions industry to invest in the UK rather than elsewhere in the world. However, the Government’s planned retrospective interference in existing property rights is akin to how a high-risk emerging market country operates; so why would pension funds invest here when Mr Gove is demonstrating that the UK is not a country for long term investment, and whereby a capricious government can simply take everything away at the stroke of a pen?

Next, let’s look at what this means to those soon-to-be independent flat owners. With no ground rent income, and in the absence of compensation being paid, many building owners will become insolvent overnight. So, who will run the building on a day-to-day basis? Mr Gove will no doubt say, “the flat owners themselves – hurrah”. But this overlooks the Governments own research, conducted in the first half of 2022 and quietly released on the last day of Parliament in July 2023. Why quietly released? Because when people were asked if they wanted to run their own buildings, 5 out of 6 responded with a very firm “No thanks”, with quotes like “I don’t like the idea of taking over management. Too much responsibility, too stressful”, and “I work full time and then on my days off, I want to relax and see my friends not be dealing with what would seem like another job”.

In a further example of the Doctor Doolittle “Pushmi-Pullyu” style legislation, those flat owners that Mr Gove wants to run their own blocks might be even more reluctant to do so when they realise that they face potential jail terms under the recent Building Safety Act.

But will flat owners simply get handed the freehold from those insolvent landlords? I’m afraid not. Instead, through legal process called “bona vacantia” (a difficult concept, but one that will have flat owners lying awake at night if Mr Gove has his way), the freehold will instead usually pass to the Crown. But does this mean that King Charles III will now have to deal with disputes between neighbours, health and safety (including all those buildings with cladding), insurance, and the day to day running of the building. Sadly not, as is made very clear by those handling bona vacantia properties on his behalf.

But won’t the managing agent (if there is one) do all of that? Sadly, no as their contract would have been with the old landlord, so they will no longer have the legal authority to spend any money. And to rub salt into the wound, the sales process will immediately grind to a halt, which will almost inevitably lead to a crash in the flat value of those people that Mr Gove thought he was helping.

So, in one fell swoop Mr Gove will stall the cladding remediation projects, tie the taxpayer up in a ruinously expensive legal challenge, destroy the UKs credibility in the global investment arena, force a reluctant public to work in their spare time to look after their building and crash the housing market. But at least flat owners will be a few hundred quid a year better off.