Draft Commonhold and Leasehold Reform Bill: Ground Rent Capping and Commonhold Revival – What We Know So Far

The draft Bill proposes that ground rents payable under existing long residential leases will be capped at £250 per year. This cap will be an interim measure, with ground rents then being reduced to a peppercorn (i.e. nil) after a 40-year transitional period has passed.

The proposals are expressly aimed at existing leases that were created before July 2023. Most new long residential leases are already subject to restrictions under the Leasehold Reform (Ground Rent) Act 2022 (GRA 2022), which generally bans ground rent being charged in qualifying leases created from July 2023 onwards.
 
The New Era of Commonhold

The Bill proposes to ban developers from selling new flats as leaseholds. Instead, flats would be sold as commonhold properties, granting flat owners complete ownership of the flat itself and collective ownership of the building it sits in together with neighbours. This reflects how flat ownership works worldwide.

It is also proposed that existing leaseholders be given the option to convert their leasehold flat into a commonhold one, though how this would look is unclear.

These proposals would mark an extreme transformation in the UK property law system, and it is currently unclear how they would be put into place. A government consultation seeking public opinion on its plans for commonhold will close on 24 April. 
 
Scope and exclusions 

At this stage, the draft legislation does not provide a definitive list of exemptions. However, in its policy statement the Government has indicated that the exemptions to the ground rent cap in the GRA 2022 would also apply under the Bill. So business leases, community-led housing and home finance plans which involve arrangement that rely on ground rent would not be affected by the cap.

The Government has also stated that it is considering an exemption for so-called “quid pro quo” leases, where the leaseholder agrees to pay a higher ground rent in exchange for a lower premium. Public opinion is sought by the Government on this point.

Any exemption is likely to be narrowly defined - the Government has said that it must be ‘limited to genuine cases where leaseholders have actively chosen to pay higher ground rents’. How this would be determined is uncertain.

How the Government might formulate any such exemptions remains to be seen in the next iteration of the Bill.  
 
Update on the LAFRA 2024 valuation reforms?

The Government has not taken the opportunity to confirm when the valuation reforms contained in the Leasehold and Freehold Reform Act 2024 (LAFRA 2024) will commence.

LAFRA 2024 introduced fundamental changes to the statutory valuation methodology for determining the premium payable during lease extensions and enfranchisement, including removing marriage value, capping the treatment of ground rent within the valuation formula and moving towards prescribed valuation rates. However, these provisions are not yet in force and still await secondary legislation.

To date, the Government has stated only that the 2024 Act will be implemented in stages. No specific timetable has been published for the valuation provisions, and there has been no indication that the new ground rent cap proposals will accelerate or substitute those reforms. As matters stand, valuation continues to be carried out under the existing statutory framework until regulations are passed to commence the reforms.

The Government has however commented on the intersection of the LAFRA 2024 valuation reforms with the ground rent cap, hinting that the cap will ‘[tend] to reduce the price payable for enfranchisement’.

Likely timing for implementation 

No immediate change to ground rents arises from the January 2026 announcement. The draft Bill must first undergo pre-legislative scrutiny before being introduced to Parliament.

Based on Government statements, and subject to Parliamentary time, the ground rent cap is unlikely to come into force before late 2028. Leaseholders and freeholders can therefore expect ground rent to continue for the next couple of years as normal under existing lease terms.

Conclusion 

The draft Bill represents a significant step in furthering the Government’s manifesto proposals to ‘[bring] the feudal leasehold system to an end’. However, it is not yet law, and important details remain subject to change.

Leaseholders and freeholders should proceed on the basis of the current legal position while remaining alert to the longer-term implications of the proposed reforms. Ashley Wilson Solicitors LLP will continue to provide updates as the legislation progresses.