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Michael Gove has been forced to water down plans to cap ground rents on millions of leasehold homes in England and Wales after lobbying by pension and investment managers who benefit from these payments. 

The levelling up secretary has been pushing legislation to reform the centuries-old system of leases under which millions of homeowners have the right to occupy their homes, which are ultimately owned by a freeholder — who collects annual payments called ground rents. 

The Sunday Times first reported that Gove had abandoned his ambition to cap these payments at nominal, or “peppercorn” rates — a 2019 Conservative party manifesto commitment — after opposition from the Treasury. 

A senior Whitehall official confirmed that the Treasury and Number 10, backed by the Department for Business and Trade, had combined to block the proposals.

“Treasury and Number 10 have caved in to the lobbying,” the insider said, adding that some final details were still being “thrashed out”, including whether the idea of peppercorn rents could be agreed, but only after a long period of transition.  

The person said talks were continuing behind the scenes. A £250 annual cap has also been mooted as possible compromise. 

The policy reversal follows pushback from groups representing investment managers and pension funds who own freeholds and benefit from the reliable, long-term income that ground rents provide. 

Failure to push through the reforms would be a personal defeat for Gove, who previously said he was “immovable” in his determination to reform the “feudal” system of leasehold property.

The Department for Levelling Up, Housing and Communities said it remained committed to strengthening protection for leaseholders and had consulted on a range of options to cap ground rents for existing leases.

“We are pleased to note that the Competition and Markets Authority recently found that ground rents are ‘neither legally nor commercially necessary’,” it said, adding that the government would set out its policy “in due course”.

There are nearly 5mn leasehold homes in England and 86 per cent of owner-occupiers pay ground rent, according to the government. 

The Residential Freehold Association, which last year wrote to Gove opposing a retrospective cap on ground rents, said it welcomed the “recognition from the government that these proposals would be unjustified”. 

But the group said it would oppose any cap on ground rents as “an unjustified interference with property rights, which would require billions of pounds worth of compensation at the expense of the taxpayer”.

The British Property Federation, a trade association, also warned the move would hurt pension savers and that the government could face a legal challenge. 

The housing department formally consulted last year on several options to reform ground rent. These included freezing rents at current levels, linking the payment to property values, setting a fixed maximum or moving to peppercorn payments. 

The consultation, whose results are still under review, attracted fierce pushback from legal and industry bodies with existing interests in ground rents.

The Compton Group, a Swansea-based property and development business with 57,000 property interests generating £3.25mn in ground rents, was among the businesses that attacked the proposals.

In a letter seen by the Financial Times, Peter Ballard, director of Compton Group, told the housing department in January that Gove’s reforms sought to “expropriate without compensation wealth which it has taken us many years to build up”.

Advocates for reform argue that freeholders extract payments without providing any benefit to the leaseholders who live in the homes, and that some leases are set up with ground rents that rise over time to exorbitant rates.

“Government is meant to serve the people, not rent-seekers and corporate lobbyists,” said Harry Scoffin, founder of Free Leaseholders, an anti-leasehold campaign group.

Angela Rayner, Labour’s deputy leader, said the reversal of plans to cap ground rents was the “latest dithering from the government . . . in the face of Tory infighting” and “yet another sign that Rishi Sunak is too weak to deliver for working people”.

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