UK government announces ground rent cap on existing leases

Ground rents, which are payable by leaseholders to freeholders and are separate to service charges, have been the subject of political focus, particularly those which rise over time.

The previous government introduced reforms to ground rents, which were banned for new residential leasehold properties under the Leasehold Reform (Ground Rent) Act 2022. The Leasehold and Freehold Reform Act 2024 (LAFRA) will also notionally cap ground rents for the purposes of calculation the premium payable by leaseholders for lease extensions.

The government has now confirmed they will go further, and cap ground rents in existing leases at £250 from 2028, reducing to zero after 40 years, through provisions in the draft Commonhold and Leasehold Reform Bill.

The government considered reducing ground rents to zero from day one but ultimately decided that the impact upon freeholders (and the risk of a legal challenge) would be too great. 

Nonetheless, the proposed cap would effectively, and retrospectively, re-write existing leases with a potentially huge effect on institutional investors, including pension funds.

Ground rent reform – along with wider leasehold reforms – were manifesto pledges by the current government, who will be keen to push these changes through. However, institutional investors impacted by the proposed measures will no doubt want to consider their options carefully. It is worth noting that, although a draft bill has been published, the accompanying Policy Statement makes clear that the government is open to receiving industry views on aspects of the bill and so there may be opportunities for the industry to influence the final form of the legislation.  Our leading Public Law and Policy and Real Estate Disputes teams are well placed to assist with this so please do get in touch if you would like to discuss these issues further.

The Bill also looks to implement proposed changes outlined last summer to reinvigorate commonhold and (eventually) do away with leasehold homes altogether. Please do look out for further alerts where will consider these aspects of the Bill in more detail.

Authored by Paul Tonkin, Julia Marlow, Tim Reid, Lucy Redman, and Louis Biggs.