Cap on ground rent to be applied to pre-existing leasehold properties

The Leasehold Reform (Ground Rent) Act 2022 introduced a ban on charging ground rent on new residential leasehold properties in England and Wales from 30 June 2022, with ground rents be capped at a peppercorn. Whilst excellent news for those considering the purchase of new leasehold properties, most felt that the legislation fell short. It failed to address a considerable issue being the (in some cases) extortionate ground rent being charged on pre-existing leasehold properties. 

To ensure a steady stream of return for investors/developers retaining the freehold title to leasehold properties, many leases in England and Wales contain burdensome ground rent provisions. Ordinarily these provisions provide for the doubling of the ground rent payable by leaseholders at regular intervals. This can result in leaseholders paying crippling grounds rents to their landlord, in addition to their usual outlay and living expenses. 

Such provisions are, understandably, looked upon unfavourably by the majority of UK lenders, with banks refusing to provide mortgages where a leasehold property’s ground rent is deemed ‘high’ or is likely to rise significantly in the near future. 

As a result of these issues, we have seen many leaseholders who have struggled to sell their properties (or obtain finance on them). Those leaseholders seek to tackle this issue by either approaching their landlord for a variation of their lease (often refused, or only agreed to provide a heavy premium is paid) or triggering their statutory rights to extend their lease term (whilst guaranteeing a peppercorn ground rent, this can see the leaseholder paying a significant amount to their landlord for the new, extended lease). 

The latest reform seeking to address this issue is to be published in the draft Leasehold and Commonhold Reform Bill, to be introduced by the current Government on Tuesday, 27 January 2026. The headline news is that a £250 per year legislative cap on ground rent is to be introduced, automatically reducing to a peppercorn rent after 40 years. 

The proposed reform will serve to provide much needed security and certainty to leaseholders, ensuring that there are no significant increases in their expenditure throughout the duration of their lease. It will also serve to prevent frustrating delays in the conveyancing process, with many leaseholders awaiting the conclusion of a long and drawn-out lease extension process before being able to place their leasehold property on the market for sale. 

In theory, a capped ground rent should also benefit leaseholders when it comes to acquiring the freehold title for their property. With the capped ground rent feeding through to enfranchisement calculations (in relation to the sum payable to the freeholder for a statutory acquisition of the freehold title), we should see a reduction in the amounts ultimately by leaseholders. 

Time will tell as to what, if any, impact the statutory cap will have on proposed developments. With ground rent providing for a future, almost guaranteed income stream for developers and investors, it remains to be seen whether the cap will lessen incentives for future leasehold developments. To combat this, with a view to mitigating this loss, we could see an increase in the purchase price of such properties, with some leaseholders currently negotiating higher ground rent provisions with developers to reduce the amount payable at the outset. 

Pension funds are also likely to be impacted by the proposed reform. As ground rent provides a guaranteed income stream, freehold/head leasehold titles are favoured by pension schemes throughout the country. A cap on ground rent will serve to lessen the yields on such investments, with providers looking to diversify portfolios by other means. The Residential Freehold Association, the trade body representing freeholders, has warned that the cap could have a negative impact on the UK’s reputation in the investment market. 

Ultimately, Keir’s TikTok announcement will be much welcome news to leaseholders in England and Wales. The Leasehold and Commonhold Reform Bill is a significant piece of proposed legislation that seeks to solve a hotly disputed topic, and an area of law that we have been expecting to be reformed for a significant period. It remains to be seen, however, what wider impact the proposed reform will have on the market more generally.