Ground rents to be capped at £250 a year – what does it mean for you?

Ground rents will be capped at £250 per year for millions of leaseholders in England and Wales, under new government plans.

The reforms will also see a ban on the sale of new leasehold flats and scrapping of rules which can see people lose their homes for owing as little as £350 in unpaid ground rent or service charges to landlords.

The changes come as part of a draft Commonhold and Leasehold Reform Bill published today (27 January).

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The government says millions of leaseholders will benefit from the reforms, saving them hundreds of pounds a year and potentially thousands of pounds long-term.

What does the Commonhold and Leasehold Reform Bill say?

The main takeaway from the government’s Commonhold and Leasehold Reform Bill is that ground rents will be capped at £250 a year from 2028, subject to the legislation passing through Parliament.

Ground rent is paid by the owners of leasehold properties, mostly flats, to the freeholder that owns the land the property is built on.

Under the Leasehold Reform (Ground Rent) Act 2022, freeholders were banned from asking for ground rent on most new leases from 30 June, 2022. Instead, the ground rent is set at a nominal “peppercorn” rate of around £0-£1.

But, under the fresh reforms laid out today, ground rent will be capped at £250 for leasehold contracts entered into before July 2023. After 40 years, the amount of ground rent owed will be reduced to nothing.

The government says the new cap could see many leaseholders saving up to £4,000 over the course of their lease.

Keir Starmer said earlier today: “I’ve spoken to so many people who say this will make a difference to them of hundreds of pounds.

“That’s really important because the cost of living is the single most important thing across the country.”

Another measure included in the bill is the banning of developers from selling new leasehold flats. Instead, flats will have to be constructed as commonhold – meaning people own the ground the flat is built on and the overall building, like a block of flats, alongside their neighbours.

People already living in leasehold flats will also be able to switch to commonhold.

“Forfeiture” rules, where leaseholders can lose their home if they owe £350 or more to their landlords in unpaid service charges or ground rent, will also be abolished.

What does the bill mean for the housing market?

Ground rents have come under fire in recent years as while some freeholders fix them, others increase them over time in line with inflation.

Around 770,000 to 900,000 leaseholders pay over £250 per year in ground rent, the most recent figures from the Ministry of Housing, Communities and Local Government suggest.

Capping them at £250 should then, in theory, mean some leaseholders end up paying less than they currently are.

Jo Darbyshire, co-founder of the National Leasehold Campaign group, said: “The £250 cap will make a difference. Particularly for people who bought new build properties in the last 20 years with punitive ground rents.”

Putting a cap into place will also make it easier for leaseholders to sell their homes, according to Timothy Douglas, head of policy and campaigns at Propertymark, a trade body for estate agents.

He said: “We know from our research with Propertymark member agents that leasehold properties with escalating ground rent will struggle to sell, even if priced correctly.

“Addressing ground rents for existing leaseholders is a key step towards a fairer leasehold system.”

Others have suggested the Commonhold and Leasehold Reform Bill, overall, doesn’t go far enough though.

Amber Krishnan-Bird, leasehold lawyer at solicitors Osbornes Law, said: “The government’s focus appears to be fully on commonhold and providing a new system rather than making any changes to the existing freehold/leasehold system, other than capping existing ground rent, which many freeholders and leaseholders are still likely to have for many years to come.

“The government says the ground rent cap may not be enforced until 2028 at the earliest and gives no timeframe for the rest of the legislation. In the interim many leaseholders will still be left facing difficult decisions over extending leases that are running out.”

Meanwhile, the Renters’ Rights Act is set to come into force in stages from May.