New £250 ground rent cap backed by Yorkshire property lawyers
Proposals to cap ground rents at £250 a year have received a mixed reaction from the property industry, but conveyancing specialists at Yorkshire law firm LCF Law believe the reforms could make leasehold homes easier to sell and help protect homeowners from rising costs.
The government recently unveiled its draft Leasehold and Commonhold Reform Bill, which would introduce a £250 annual cap on ground rents for leasehold properties in England and Wales as part of a wider overhaul of the leasehold system.
According to the government, there are more than five million leaseholders in England and Wales, around 4.2 million of whom pay ground rent to the freeholder who owns the land their home stands on.
Leasehold properties are typically flats and apartments, although some houses are also sold under the same arrangement.
While ground rents were abolished for most new residential leaseholds in 2022, many existing properties are still subject to the charges.
Julie Davis from LCF Residential said ground rents have long been controversial because leaseholders often pay them without receiving services in return.
“Ground rents are controversial because leaseholders pay them to freeholders, which are often pension funds, for the right to occupy land their home stands on, without receiving any services in return,” she said.
“In some cases they can also double or rise in line with inflation at fixed intervals.”
Under the proposed reforms, the £250 annual cap would eventually reduce to zero after 40 years.
Industry groups such as the Residential Freehold Association have warned that the changes could affect pension funds and companies that invest in freehold interests.
They argue that if professional freeholders exit the sector it could disrupt the management of apartment developments and ongoing building safety projects, including cladding replacement programmes.
However, Ms Davis believes the proposals could also bring important benefits for homeowners.
“This cap could save some people hundreds or even thousands of pounds each year,” she said. “Crucially, it will also make leasehold homes much easier to sell, because buyers often avoid them due to concerns about escalating ground rents and some lenders are reluctant to offer mortgages on them.”
The draft legislation also proposes banning the sale of new leasehold flats and replacing them with a commonhold system, where owners collectively own and manage their building and the land it stands on.
However, a report by consultancy WPI Strategy published earlier this month estimated the cap could reduce the value of ground rent investments by up to £18.7bn, equivalent to around 0.6 per cent of the UK’s annual GDP.
The analysis suggested some landlords could benefit financially from the changes, potentially receiving around £8.7bn in windfall gains, because many leasehold properties are owned by buy-to-let investors who pay the ground rent rather than tenants.
The report also warned that uncertainty around changes to long-term property contracts could reduce investor confidence and slow housebuilding.
Despite the debate, the government insists the reforms are needed to tackle what it describes as an unfair system. The bill is currently subject to consultation and parliamentary scrutiny.