Can Ground Rents be Reduced to Nothing?

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Can Ground Rents be Reduced to Nothing?

It is being reported that the government will make significant changes to the Leasehold and Freehold Reform Bill and, in particular, the ground rent provisions. Previously, the government had intended to immediately cut all grounds to a peppercorn, effectively reducing them to zero immediately. Now they apparently intend limit ground rents to £250 per annum and then slowly reduce them over twenty years to a peppercorn.

In part at least, it seems that this decision has been driven by the threat of legal action from freeholders. That is not overly surprising. The European Convention on Human Rights (ECHR) and particularly Article 1 of Protocol One of the Convention, prohibit removing individuals’ land, or their rights over it, without proper compensation. The European Court of Human Rights, most notably in the case of Malta v Gauci, has held that forcing landlords to accept an unreasonably low rent, or no rent, could be a breach of A1P1. Clearly forcing landlords to accept a peppercorn ground rent risks falling within the same reasoning.  Presumably, the Government hopes that the majority of landlords will simply divest themselves of their freehold interests or that leaseholders will exercise the vastly increased powers to purchase those freeholds themselves. Accordingly, the problem will to a large extent resolve itself over the twenty-year period.

However, this does not really resolve the issue. The reality is that landlords are being forced to divest themselves of their properties or accept that they will eventually not obtain any ground rent at all. In practice, this amounts to a forced sale to leaseholders (as nobody else will want to buy) at a price that is likely to be below the market price that those freehold interests would have previously commanded. Whichever way you look at it, there is a serious risk of a breach of the convention. It was something that had already been raised in the House of Lords and was likely to prove a barrier to the Bill progressing through the upper chamber effectively.

The government might try to claim that its breach represents a proportionate response to a problem which is within the scope of the wide margin of appreciation afforded to contracting states by the Convention. Therefore, it is a reasonable thing to do. That argument is substantially strengthened both by the fact that a lot of freeholders may have purchased their interests after the Conservative government made clear that they were minded to introduce policies to reduce ground rents to zero. Coupled with the 20-year feed-in period to allow for landlords to seek alternatives, this argument has a decent chance of succeeding.

So, the proposed amendment is one which, although annoying to leasehold groups, is likely to provide the best balance between change and avoiding a risky and potentially damaging trawl through the European courts. On that basis it is a sensible decision by Michael Gove allowing him to get his proposals through without a risk of them being stopped by legal challenge.

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