Government to cap ground rents: what you need to know
How will the Government implement the caps?
The Government has confirmed plans to cap ground rents on existing long residential leases at £250 per year for 40 years, after which they will reduce to a peppercorn (£0).
Since the Leasehold Reform (Ground Rent) Act 2022 came into force, it has not been possible to grant new long residential leases with a ground rent. However, once the Commonhold and Leasehold Reform Bill comes into force, the new cap will also apply to most pre-2022 leases. The Government anticipates that the legislation may come into force in late 2028.
This represents a significant structural shift for the leasehold market and forms a central part of the Government’s wider programme of leasehold reform.
What is the financial impact?
The Government estimates that leaseholders paid £600 million in ground rents last year. A substantial portion of the market is held by institutional investors, including pension funds, many of which have long-term exposure to ground rent income streams.
According to the Government’s initial assessment, the cap is expected to deliver savings of between £10 billion and £12.7 billion to leaseholders, equating to a value transfer of 55 to 61 % from landlords to leaseholders. A more detailed impact assessment is expected shortly. This will be a significant document, as it will be highly relevant to any human rights challenge .
Will there be a legal challenge?
Given the scale of the wealth transfer and the fact that the Government intends to intervene in historic agreements made between private parties, the cap is fertile ground for a challenge under the Human Rights Act 1998.
Any challenge is likely to be made after the bill is passed by Parliament. In view of this, even more eyes will be on the ongoing human rights challenge to the Leasehold and Freehold Reform Act 2024. The High Court recently robustly rejected a challenge made by a group of landlords to that legislation, demonstrating a reluctance to intervene in leasehold reform where there is a justifiable public-interest reason for the policy. The High Court’s decision is in the process of being appealed, and the outcome of that appeal will have a significant bearing on any challenge to the ground rent cap.
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