"The inclusion of a ground rent cap in the draft Leasehold and Commonhold Reform Bill represents a wholly unjustified interference with existing property rights"
- Residential Freehold Association
Labour's new £250 annual ground rent cap, announced today in the draft Leasehold and Commonhold Reform Bill, has sparked fierce warnings from the property investment sector about its impact on investor confidence and potential compensation liabilities.
The reforms will limit ground rents to £250 per year for leaseholders in England and Wales, while banning new leasehold flats and granting existing leaseholders the right to convert to commonhold. Prime Minister Keir Starmer revealed the changes in a TikTok video, telling viewers the reforms would save homeowners hundreds of pounds annually.
Unprecedented interference
However, the Residential Freehold Association condemned the proposals as an unprecedented interference with existing property rights. "The inclusion of a ground rent cap in the draft Leasehold and Commonhold Reform Bill represents a wholly unjustified interference with existing property rights, which if enacted, would seriously damage investor confidence in the UK housing market and send a dangerous and unprecedented signal to the wider institutional investment sector," a spokesperson for the RFA said. "Property rights and contract law are fundamental drivers of domestic and global investor confidence in the UK."
The trade body warned that professional freeholders could be forced to exit the sector, potentially disrupting building safety projects and affecting residents' day-to-day lives. They emphasised that the government's own impact assessment showed compensation could exceed £27bn.
The announcement follows months of political tension between the Ministry of Housing and the Treasury over the ground rent issue. Treasury officials had pushed back against the reforms due to concerns about their impact on pension funds, which hold an estimated £15bn in residential ground rents according to RFA figures. Total investment in UK ground rents is thought to exceed £30bn.
"Instead of focusing on those reforms which address the issues that leaseholders care most about, the Government's draft Bill will tear up long-established contracts and property rights, which are pillars of the UK's investment reputation," the spokesperson added. "This is, despite the previous government's own impact assessment showing compensation could exceed £27 billion."
Mark Chick, partner at Bishop & Sewell and director of the Association of Leasehold Enfranchisement Practitioners, previously commented that a complete ban on ground rents would likely lead to significant compensation claims. "Government has clearly undertaken a balancing act between the human rights considerations of 'deprivation' and 'control' of property in seeking to find a balanced solution," he noted in earlier analysis.
The reforms affect approximately 5m leasehold homes across England and Wales. Ground rents were already abolished for most new residential leasehold properties from June 2022 under the Leasehold Reform (Ground Rent) Act 2022, but existing leases remained subject to their original terms.
Secretary of State for Housing Steve Reed defended the changes, noting that leaseholders can be forced to pay ground rents that become completely unaffordable. The government has also pledged to scrap the controversial practice of forfeiture, which allows landlords to seize properties over debts as small as £350.
The reforms will take effect in 2028, giving the market time to adjust. The draft bill also strengthens the commonhold framework, offering leaseholders a pathway to gain direct ownership stakes in their buildings with enhanced control over management decisions.
For institutional investors and pension funds, the reforms represent a major policy shift that could reshape the UK's leasehold investment landscape. The RFA maintains that the measures will undermine the UK's reputation as a stable investment destination while failing to address the core issues affecting leaseholders.
Housing minister Matthew Pennycook previously indicated his preference for ground rents capped at a peppercorn rate, effectively zero. However, the £250 compromise appears designed to balance leaseholder protection with minimising compensation claims and legal challenges from property rights perspectives.
The consultation responses and final parliamentary scrutiny will determine whether further amendments emerge before the bill progresses through Parliament.
