Will the looming ground rent cap help or hinder property sales?

Reform of ground rents is long overdue and the Government is committed to capping most existing long residential ground rents at £250 a year, before reducing them to a peppercorn after 40 years through the forthcoming Commonhold and Leasehold Reform Bill.

The draft Bill, published in January 2026, has now completed pre-legislative scrutiny and the final legislation is awaited.

Its measures sits within a wider programme of change following the Leasehold and Freehold Reform Act 2024 and reflects a broader attempt to make leasehold less punitive for consumers while preparing the ground for wider use of commonhold.

The scale of the issue explains why Ministers feel compelled to act: Their draft impact assessment estimates that around 3.8 million residential leasehold properties in England and Wales are subject to a ground rent, with 770,000 to 900,000 paying more than £250 a year.

ALEP, which represents solicitors and valuers working within leasehold reform, conducted its own research.

Undesirable impact

Some 80% of its membership agreed that ground rents can have a negative or undesirable impact on the sale of leasehold properties and 70% said some ground rents cause problems in agreeing a mortgage, while selling a property with a high ground rent can also be an issue.

The Government has also argued that a future move to a peppercorn rent would remove the two-tier position between older and newer leases already caught by the Leasehold Reform (Ground Rent) Act 2022 and should support the longer-term move towards commonhold.

But not all leaseholders will experience reform in the same way. Some already pay a peppercorn or very low rent and will see little immediate benefit.

Others may feel aggrieved if they have already paid significant sums to extend a lease.”

Others may feel aggrieved if they have already paid significant sums to extend a lease or acquire a freehold based on current rules, only to see their neighbours benefit if a cap is introduced. That raises questions of fairness between different groups of leaseholders and could affect harmonious relationships, which are crucial if share of freehold or commonhold arrangements are to succeed.

Also, where the real problem has been poor advice, opaque drafting or inadequate explanation at the point of purchase, a cap on ground rents addresses the symptom rather than the cause.

ALEP’s survey found that 43% identified problems arising because the full ground rent terms had not been made clear when the property was bought, while a third said leaseholders often do not understand how much the ground rent will increase.

Reform should be accompanied by better consumer understanding and better professional advice, not treated as a substitute for them.

Value transferred

These proposals are negative for freeholders. Ground rent portfolios are valued relative to the income they produce, and the Government accepts that the policy will inevitably transfer this value to leaseholders.

That is why the Government rejected an immediate peppercorn cap for existing leases and instead opted for a £250 cap moving to peppercorn after 40 years – but freeholders will argue that this is not enough.

Furthermore, it would be wrong to make assumptions about freeholders. They are not all wealthy private individuals but also pension funds, charities and local authorities, all of which may see income reduced.

Be prepared

It is important for freeholders to be prepared. Portfolios should be reviewed to identify leases with rents above or approaching the proposed cap, especially where escalation clauses are onerous.

The likely impact on valuation, income forecasting and financing arrangements should be reviewed now, before the proposals become law.

The likely impact on valuation, income forecasting and financing arrangements should be reviewed now.”

Freeholders should also pay close attention to the detail of implementation, exemptions and any secondary legislation, because the operational impact may turn on drafting rather than principle.

The current consultation on quid pro quo leases is a good example. The Government is considering a narrow exemption where a higher ground rent was agreed in return for a corresponding reduction in premium.

Comfort

From the market, the benefit is that the cap should address the ongoing onerous ground rent debate, providing comfort for lenders and leaseholders.

But that redistribution does not occur in a vacuum. If asset values are reduced retrospectively, investors will look more carefully at the security of future residential income streams. Stability and predictability are of utmost importance.

There is also a risk of creating fresh distortions. Some leaseholders will gain immediately, while those who already regularised their position under the old rules may feel left behind.

Some share of freehold arrangements may also face internal tensions if earlier decisions were taken in reliance on continuing ground rent income. Reform may therefore remove one unfairness while creating new areas of resentment.

Unintended consequences?

One possible unintended consequence is pressure on the economics of future housing schemes.

For example, it has been argued that ground rent income provides some compensation for developers with Section 106 obligations to provide affordable housing.

If that is the case, removing this long-term income stream while development viability is already being asked to absorb significant Section 106 obligations could require a rebalance elsewhere – potentially in land values, pricing structures or reduced headroom for affordable housing, with potentially wide-ranging consequences.

There are practical obstacles too. The final Bill has yet to pass through Parliament, followed by any secondary legislation and implementation.

The Government has indicated that the cap could come into force in late 2028.”

The Government has indicated that the cap could come into force in late 2028, although the Housing, Communities and Local Government Committee recommended bringing that forward to late 2027. Legal uncertainty also remains. The High Court rejected a human rights challenge to separate enfranchisement valuation reforms in LAFRA, but the Court of Appeal has since granted permission to appeal.

That continuing litigation is another reminder that major retrospective changes to property rights are likely to be contested.

The 40-year transition to a peppercorn is intended to soften the impact on freeholders and investors. However, the HCLG Committee has questioned whether such a long period is justified and recommended a shorter transition, such as 20 years.

While the proposed ground rent cap addresses a genuine problem and will benefit many leaseholders, the success of the reform cannot be judged solely by whether it produces an appealing headline, or a quick political dividend, and implementation will be the true test.

Author bio: Shabnam Ali-Khan is a Partner at Russell-Cooke and a member of ALEP (the Association of Leasehold Enfranchisement Practitioners).