Ground rents for leaseholders to be capped at £250 a year

Leaseholders will not pay more than £250 per year in ground rent under new proposals from the government. The changes, announced by Prime Minister Keir Starmer this week, also include plans to ban the sale of new leasehold flats and abolish lease forfeiture.

The reforms are part of the draft 'Commonhold and Leasehold Reform Bill' introduced to parliament this week. It will next be scrutinised by the Housing Committee, with the government hoping the cap will come into force in late 2028. Around five million homes in England and Wales are owned through leasehold, where people own the right to occupy the property for a limited number of years under a lease from the freeholder.

Steve Reed, the housing secretary, said: "If you own a flat you can be forced to pay ground rents that can become completely unaffordable. We said we’d be on the side of leaseholders - which is why today we are capping ground rent - helping millions of leaseholders by saving them money and giving them control over their home.

"The leasehold system has tainted the dream of home ownership for so many. We are taking action where others have failed - strengthening home ownership and calling time on leasehold for good."

What changes are being proposed?

Ground rents will be capped at £250 annually, with a plan to eventually reduce them to a "peppercorn" rate - effectively reducing the cost to a nominal, symbolic amount. The government expects the initial cap to begin in late 2028, meaning leaseholders will have to wait until 2068 for rents to reduce to the nominal peppercorn level. The construction of new leasehold flats will be banned too, though only for residential homes and with some exceptions.

Forfeiture will also be abolished. This is when leaseholders lose their home and any equity built up by defaulting on a debt to the freeholder, sometimes as little as £350. A new enforcement regime will replace the system, which the government claims will create a fairer balance between landlord and leaseholder. In addition, a new process will be established to make it easier for existing leaseholders to convert to commonhold. Current leaseholders will be given the opportunity to switch to commonhold if the majority of residents agree to it.

Under the proposed new commonhold model, leaseholders will receive a stake in the ownership of their buildings, have a stronger say in the issues that affect them, and greater control over how the building is managed and what bills they pay. Residents will have a say in the annual budget and how the building is run, and also be given new protections in case things go wrong. The government has said strong management rules will be put in place around repairs and leadership, though more precise details will only come at the consultation period, which started this week.

Why are ground rents being capped?

Ground rents are being capped as part of the government's plan to reform leasehold property ownership. Some ground rents are very expensive and it is common for the bill to double or increase by RPI at fixed intervals. As well as being a financial burden, this can make it much more difficult to secure a mortgage if you want to buy a leasehold property or sell your home if you want to move. The current Labour government promised to "finally bring the feudal leasehold system to an end" in its 2024 election manifesto.

The government hopes the changes will deliver savings of over £4,000 over the course of their lease for some homeowners and enable house sales for leaseholders with difficult ground rent terms.

Jo Darbyshire, co-founder of the National Leasehold Campaign, said: "The £250 cap will make a difference," and it is "encouraging that the government recognises that monetary ground rents must end. However, 40 years is an incredibly long time to wait for peppercorn ground rents."

The English Housing Survey estimated that in 2023/24, the average annual ground rent for leasehold owner-occupiers was £304 a year, only £54 above the proposed cap. The legislation does not address service charges, which are also payments that leaseholders have no control over, though the government has suggested these could be reformed in the future.

Will leasehold be abolished?

Not by this proposal. New residential leaseholds would be banned, if the current draft is maintained, but existing leaseholds would continue. There are also exemptions laid out in the government's plan, and the possibility for more as the legislation moves through parliament.

For example, the government has committed to "further engagement on appropriate treatment of quid pro quo leases (where the purchase price was demonstrably lower as a result of a higher level of ground rents)". This suggests the new commonhold rules could be ignored if a property had been sold for a reduced price because it was leasehold, an exemption that would likely cover a significant number of UK leasehold properties.

The government has also said that new leaseholds will be banned on residential flats, but "there may be some limited exemptions where leasehold may still be appropriate." With exemptions already in place and houses excluded, it seems leaseholds may still be hanging around for some time.

What will the leasehold cap mean for house prices?

Somewhat unsurprisingly, the trade body representing professional freeholders, the Residential Freehold Association (RFA), has argued the changes will have a negative impact on the housing investment sector. An RFA spokesperson said: "The inclusion of a ground rent cap in the draft bill represents a wholly unjustified interference with existing property rights which if enacted, would seriously damage investor confidence in the UK housing market and send a dangerous and unprecedented signal to the wider institutional investment sector."

This perspective has already had an impact on the reforms, with ministers under significant pressure from groups seeking to limit the scope of the changes. Former Housing Secretary Angela Rayner said colleagues were "subjected to furious lobbying from wealthy investors", which could explain the decision to introduce a cap on ground rents and leave room for exemptions, rather than abolish leasehold altogether.

Should you avoid buying a leasehold property?

Millions of homes in England and Wales are leasehold properties, but it certainly can be off-putting for some buyers. Securing the guidance of a mortgage broker is often the best way to cut through unfamiliar terminology and source the ideal mortgage. Mortgage brokers have in-depth knowledge of qualifying criteria across the lending market, as well as access to broker-only mortgage deals that customers cannot access without going through an intermediary.

If you do not have a mortgage broker, you can source one using the online directory of financial professionals, Vouchedfor*, where you can filter options based on your location, needs and other customers’ reviews of the service provided. Alternatively, if you are happy to speak to a mortgage broker online and over the phone, Habito* provide a free mortgage broking service via these mediums and have access to thousands of mortgage deals from over 90 lenders in the market.

 

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