The phrase ‘sledgehammer to crack a nut’ doesn’t quite measure up when it comes to the overblown solutions that housing secretary Michael Gove is weighing up to fix problems with residential ground rent

Lem Bingley

Lem Bingley, PW editor

It seems more akin to wielding Mjölnir to pummel a pistachio, though I doubt Thor’s magical hammer would feel obliged to move in Gove’s grip.

Few would argue with the principle that contracts ought to be reasonable, and it is beyond doubt that some ground rent agreements made in the past would not meet that test. Any lease that involved ground rent doubling at regular intervals will have been unjust from the outset.

It has been known since ancient times that doubling is a process that quickly gets out of hand. If you place one grain of wheat on the first square of a chessboard, two on the second, four on the next, and keep on doubling, the 64th and final square of the board will require more wheat than has been grown in the world in the past 2,000 years.

It is, of course, right for government to step in and prevent unscrupulous freeholders from enforcing this kind of spiralling trap for the unwary.

But is it equally fair to prevent a legitimate freeholder from, say, linking ground rent to inflation? Gove seems to think so, for reasons that aren’t entirely clear.

Michael Gove shutterstock_2229800903 LINGTREN

Michael Gove

Source: Shutterstock / LINGTREN

The complexity of the underlying situation is made apparent by the government’s own consultation, recently closed, which set out no fewer than five separate options for imposing a limit on ground rent payments. For the sake of brevity I’ll summarise the five as scrapping, capping, gearing, restoring and freezing. And despite this spread of differing options, some believe none of them are workable.

The substantial stumbling block is that any government intervention to artificially limit ground rent will tend to reduce the value of the freehold – and common law suggests owners deserve compensation. Many of those owners are not fly-by-night chancers but solid, reputable organisations such as pension operators.

It is probably not good value for money for taxpayers to spend £6.2m per dodgy contract

Much like the mounting grains on a chessboard, the scale of potential compensation is somewhat bigger than a casual glance might detect. The Residential Freeholders Association (RFA) puts the likely figure at £31bn.

Meanwhile, the British Property Federation estimates that the number of problematic ground rent agreements – the core issue that needs to be fixed – is probably limited to about 5,000 in number.

In other words, it is probably not good value for money for taxpayers to spend £6.2m (about 22 times the average value of a UK house) per dodgy contract. It would be much, much cheaper for the Treasury to simply buy up all the problem freeholds and leave the rest of the property sector in peace.

The RFA is urging the government to work more co-operatively with the industry, to root out bad apples without spoiling the whole crop.

I suspect such pleas will fall on deaf ears. To mangle another common phrase, to a secretary of state with a hammer, everything looks like a nut.