In the second part of our series on the Commonhold and Leasehold Reform Bill, we look at the proposed cap and eventual ban on ground rents.

Ground rents were originally a form of part payment for a property, reducing the initial purchase price. Following the expansion of the ground rent secondary market, ground rent levels increased exponentially, becoming a financial burden for leaseholders.

The rise in onerous ground rents, which  buyers often appeared unaware of, sparked the ‘ground rent scandal’ and a subsequent CMA investigation, leading to the ground rent ban in 2022.

What Part 3 Actually Does:

Following the Leasehold Reform (Ground Rent) Act 2022, new ground rents for residential leases were restricted to a nominal “peppercorn” (nil) but this did not cover the millions of existing leases created before that reform. Many modern leases contain escalating or onerous ground rent clauses which make properties harder to sell, harder to mortgage and in the long run, inflate long-term homeownership costs.

Part 3 now fills this gap by extending the ground rent regulation to the leases not caught by the 2022 Act leases. Key elements include:

• A cap of £250 per year on ground rents for existing leases, regardless of what the lease states.
• A transitional period of 40 years, after which ground rents will reduce to a peppercorn (nil) rent

These reforms are subject to parliamentary approval and guidance states this element of the Bill is planned come into force in 2028.

Part 3 for Leaseholders:

For many leaseholders, this will help ease financial pressures. The ground rent has in newer leases been a costly and sometimes an irrational charge, which often increases with steep review clauses or doubling periodically. These terms can significantly affect the resale value and the ability to mortgage a property, as currently some lenders are reluctant to grant loans on leases with high expected ground rent liabilities.

Once enacted, Part 3 helps leaseholders by:

• Reducing ongoing costs as high ground rents can eat into household budgets without delivering any service in return.
• Restores marketability as it allows the market to now access these properties with capped rents which were previously “un-sellable” due to the rent clauses. The property will likely to be accepted by mortgage lenders, boosting liquidity and value.
• Increases the long-term value of the property as the transition to a peppercorn rate after 40 years means the property now holds the long-term value
• Aligns the old and new leases and removes the disparities of ground rent terms which created a two-tier market.

The government’s Explanatory Notes for the Bill estimate that this reform could deliver £10 billion–£12.7 billion in savings (in present-day value) to leaseholders over time and help around 770,000–900,000 households who are currently paying ground rents above the cap.

Part 3 for Landlords and Investors:

The proposal will impact the investment market and long-term yield projections for freeholders. By capping current and future income for Landlords from ground rents, the Bill alters the financial fundamentals for freeholders and investors for whom these payments historically have been a reliable long-term revenue stream.

The investors (including pension funds) will see a reduction in the value of existing ground rent assets and some consider this will weaken investor confidence in UK property markets and potentially dampen the willingness to invest in future residential developments. As a result, the investment property market could see a significant decline.

Lease extension and enfranchisement claims are also likely to see a reduction in value, given the reduced ground rent income, although we still await the new valuation regime coming into force under the Leasehold and Freehold Reform Act 2024.

Whilst the reform raises tension between tenant protection and market confidence, many consider the long-term benefits outweigh the short-term investor concerns. Part 3 is poised to bring lasting changes to the leasehold landscape, with the potential to address long-standing issues surrounding ground rent.

As the Bill progresses through Parliament, its impact on leaseholders will become clearer. It is crucial for all stakeholders to remain engaged and proactive in understanding how these reforms will shape the future of leasehold ownership together with developments in enfranchisement and commonhold.

For further information about ground rent, leases or leasehold enfranchisement, please contact William Bethune or Nisha Patel.