Ground hire cap for leaseholders: What is altering, why is it controversial and when will it occur?

The Prime Minister today announced that the ground rents leasehold property owners in England and Wales pay to their freeholders will be capped at £250 a year.

Making the announcement in a video on TikTok this morning, Keir Starmer said the cap will save some families hundreds of pounds.

There are estimated to be more than 5million leaseholders, 4.2 million of which pay ground rent, according to Government figures.

Leaseholders pay ground rents to their freeholder for the ‘right’ to occupy the land their home is built on. Some see it as controversial as it is a nominal charge and there is no service given by freeholders in return.

The Government’s plan is that, in 40 years’ time, the £250 cap will change to become a ‘peppercorn’ or virtually zero. 

The proposal could have a wider economic impact, as pension funds invest in freehold property and charge ground rents in order to pay out to retirees. 

We set out to explain what the £250 ground rent cap will mean for leaseholders, whether it will happen and what it could mean for the property market. 

How much is ground rent now? 

With leasehold, people buy the right to live in their home for a set period of time, but don’t own the land it sits on. 

This arrangement is most common with flats, but it can happen with houses, especially on new-build estates. 

Among leaseholders who pay ground rent, the average household pays £304 per year, according to the latest English Housing Survey from 2023 to 2024.

Although the average may have increased since then, this suggests the average leaseholder will make £54 in savings each year when the cap is introduced.

However, annual ground rent is typically lower for leaseholders living in houses than flats.

The average leaseholder in a house pays £199 while those in flats pay £343, according to the survey. It means the average leaseholder living in a flat will make a £93 yearly saving, thanks to the cap. 

In London, the typical leaseholder in a flat is paying £412 a year in ground rent meaning the cap will save them £162 a year on average.

Leasehold houses are most common in the North West, whereas leasehold flats are most common in London. 

With the North West excluded, the average ground rent for houses is £360. 

In reality, there will be many leaseholders paying vastly more than the average. For these people, today’s announcement will be a huge relief. 

When will the £250 cap start?

The £250 cap is part of the draft Commonhold and Leasehold Reform Bill, published today. At the moment, it is just a proposal and not law. 

It will now move into what is known as pre-legislative scrutiny, expected to be carried out by the Housing, Communities and Local Government Select Committee. 

The Government has suggested the £250 ground rent cap could come into force in late 2028, though it could take longer. 

Separate legislation to reform leasehold, the Leasehold and Freehold Reform Act, was passed more than 18 months ago but implementation  has been held up by legal challenges from freeholders. 

Harry Scoffin, founder of campaign group Free Leaseholders, thinks the government is being too slow to take action.

‘A ground rent cap not taking effect until the end of 2028 is far too close to the next general election, repeating the foot-dragging of governments of old,’ he says.

Why are ground rents a problem? 

The Leasehold Reform (Ground Rent) Act 2022 effectively banned ground rents on leases granted after June 2022. 

Today’s proposal would eventually extend this to the majority of leaseholders, whose leases started before then. 

While an average ground rent of £304 per year might seem a relatively small amount, some leases include clauses which rise in line with the retail price index inflation rate every five, 10 or 20 years. 

This meant someone who bought a flat with a £600 annual ground rent in 2016 would see their ground rent rise to around £950 this year. In 10 years it would have risen again and they were entirely at the mercy of what happened to inflation in the interim.

Other ground rents double every 10, 20 or 25 years. Under a 10 year clause, that would see someone paying £600 in 2016 double to £1,200 this year, then in 2036, their ground rent would rise to £2,400 and then to £4,800 in 2046 and so on.

A further complication is that a bank may refuse to lend on a home if the ground rent exceeds 0.1 per cent of a property’s value. 

If a flat is worth £200,000, a £250 ground rent still breaches that threshold. 

And ground rents can also put off future buyers, making properties a challenge to sell. 

Liam Spender, a lawyer who successfully challenged his own freeholder over secret insurance commissions, says the £250 ground rent cap ‘sounds the death knell for leasehold’ in England and Wales.

‘Some will no doubt be disappointed that ground rents are not being eliminated immediately and are instead being phased out over 40 years,’ says Spender.

‘However, crucially the cap will make it cheaper for people to buy the freehold and to extend their leases, both of which are priced by reference to ground rent values. 

‘Ending ever increasing ground rents should also make flats easier to sell and mortgage because there is often a need to vary ground rent terms simply to get transactions over the line.’

Why do freeholders say the change is unfair? 

Freeholders claim the reforms are unfair because it would harm their financial interests and could lead companies who make their money through owning freehold properties to collapse. 

Pension funds could take a hit, as owning freehold property and charging ground rent on it is one of the ways they invest savers’ cash. 

If ground rents were capped, it could reduce the amount if money they can make and therefore the amount they have to pay out to pensioners. 

It is likely they would look to make up the shortfall by making other investments, but it could cause short-term problems. well as wipe out investments held in pension funds. 

More widely, freeholder lobby groups say the Government interfering with their property rights would damage confidence in the UK as a place to invest.

There are also concerns about the unintended consequences that a retrospective cap on ground rents could have for building safety, especially on blocks of flats which are mid-way through fixing unsafe cladding. 

The Residential Freehold Association warns that if freeholders became insolvent, their responsibilities under the Building Safety Act would be passed to leaseholders, and insurance policies would also lapse or default, leaving millions of homes uninsured and unmortgageable. 

A spokesperson for the RFA says: ‘The Government’s draft Bill will tear up long-established contracts and property rights, which are pillars of the UK’s investment reputation. 

‘The resulting forced exit of professional freeholders from the sector will hinder building safety projects and disrupt the day-to-day lives of residents.’

Stuart Collar Brown, a property auctioneer at Bidx1, point out that if freeholders exit, leaseholders could be left to manage their blocks themselves. 

While some flat owners already do this under the Right to Manage, it won’t work under all circumstances.

‘The real danger here is that by removing the incentive for institutional freeholders, who are often pension funds, we risk leaving people to manage complex flat blocks and buildings themselves,’ says Collar Brown.

‘If these professional entities exit the market, you could have 100 residents in a block, with no prior experience, suddenly responsible for insurance, lift maintenance, and major structural repairs. 

‘For many, paying £250 a year for professional oversight is a price well worth paying for peace of mind.’

What else could change for leaseholders? 

While capping ground rents will help, rocketing service charges, insurance premiums, and ongoing cladding issues are also causing problems for leaseholders. 

The draft Commonhold and Leasehold Reform Bill promises to tackle some of these issues.

It will make it easier for existing leaseholders to convert to commonhold, giving them greater control over how the building is managed and the bills they pay. 

Current leaseholders will also be given the opportunity to switch to commonhold, where the majority of residents agree to it. 

Separately, the Leasehold and Freehold Reform Act 2024, which has been passed but not implemented, could make it cheaper for Britain’s 5.2million leaseholders to extend their leases or purchase the freeholds of their buildings. 

However, leasehold campaigner Harry Scoffin fears the proposed reforms will not go far enough in helping exisiting leaseholders.

He says: ‘We are deeply concerned that, despite being a Labour manifesto promise to end the grossly unfair and extortionate leasehold system, which makes England and Wales international pariahs, it is now being propped up by a two-tier approach. 

‘Buyers of future developments will get democracy in the home through commonhold, while those of us already trapped in leasehold will remain in servitude to freeholders.’