On 9 November 2023, we reported that the Government had published its consultation on capping ground rents in long residential leases in England and Wales.  The consultation was originally due to be open for a period of 6 weeks but has been extended by 4 weeks until 17 January 2024.  This will be a welcome extension to the deadline for freeholders, investors and others given the seismic changes which the Government is proposing in that consultation.

Meanwhile, the Leasehold and Freehold Reform Bill, which is likely to contain the legislation implementing any changes to ground rents in existing leases, is currently making its way through Parliament and had its second reading in the House of Commons on 11 December 2023.  It appears from the second reading, that notwithstanding the consultation, the Government is determined to eliminate ground rents by reducing ground rents in all existing leases to a peppercorn (zero ground rent).  During the debates, Michael Gove stated “As I say, I cannot pre-empt the consultation but, in a way, I already have, because I was asked by the Select Committee last week what my favoured approach would be, and I believe that it should be a peppercorn.  Of course, if compelling evidence is produced, as a Secretary of State with great civil servants, I will look at it, but my preference is clear, and I suspect that it is the preference of the House as well.”

These comments are surprising given that the Government is consulting on five different options for capping ground rents in existing leases.  Whichever option is chosen, it will effectively rewrite existing contracts between landlords and leaseholders and interfere with existing agreements reached between those parties.  For those that have invested in leasehold property, the Government’s proposals will come as an unwelcome development in circumstances where the Government has clearly stated it will not compensate those investors and freeholders for loss of income.  Any ground rent cap in existing leases will further reduce the premiums payable for lease extensions and enfranchisement of houses and flats, notwithstanding the Government’s separate proposals in the Bill to reduce premiums.  

This pre-emptive statement should also be considered in light of the Government’s own impact assessment, published on 6 December 2023, which estimates that restricting ground rent to a peppercorn in existing leases would cost freeholders' income in the sum of £5.1 billion over a 10-year period.  In addition, there would be a change in asset value by calculating the loss of ground rent income over the remainder of lease terms of an estimated £27.3 billion (including the loss for the first 10 years of £5.1 billion).  

The impact assessment acknowledges that freeholders will exit the market if a peppercorn ground rent is introduced into existing leases.

Details of how to respond to the consultation can be found here.  Given the substantial changes proposed by the Government, all those stakeholders involved in leasehold property are encouraged to respond.

We are continuing to track developments on our Essential Residential Hub and our timeline: Changing landscapes in residential leasehold.