The Ground Rent Cap – Winners, Losers and Impact on Residential Portfolios

The Government is continuing to progress significant reforms to the residential sector to achieve its manifesto commitment of ending the leasehold system in England and Wales.

The latest legislation is the Commonhold and Leasehold Reform Bill (“Bill”) which was introduced in January 2026 and when implemented, will have substantive and wide ranging impact in terms of both leasehold and commonhold residential properties (see our previous Law Now here).

A controversial aspect of the Bill relates to the proposals to cap existing ground rents at £250 for a 40-year transitional period, after which ground rents will reduce to peppercorn. 

These proposals aim to reduce costs for leaseholders and simplify the leasehold system, but they will also have material implications for landlords, developers, investors and pension funds. 

While the Bill is at an early stage, understanding the Government’s motives and objectives now will prove vital to helping landlords prepare for the changes ahead. 

What is ground rent?

Ground rent has been part of the English leasehold system for centuries. Traditionally, it was a modest, largely symbolic payment acknowledging the landlord’s ownership of the land. Unlike service charges, it is not intended to compensate the landlord for the services that it provides and it was not intended to be a commercial revenue stream.

As time progressed, landlords and investors began to see ground rent as a predictable, long‑term income source. 

As a result, freeholds gradually acquired more and more value, with certain property developers granting leases designed to maximise such income, such as higher starting ground rents combined with provisions such as compounded index-linked increases or frequent doubling. Large ground-rent investment portfolios quickly became a valuable, reliable commodity. 

What’s wrong with ground rent?

Despite being a feature of the English leasehold system for centuries, it was not seen as a ‘problem’ until more aggressive ground rent practices received widespread media coverage in 2017. 

It was estimated that around 100,000 leasehold properties were left with spiralling ground rents which doubled every 10 years. Over the course of a 999-year lease, an initial ground rent of a few hundred pounds could quickly reach many thousands of pounds a year. 

The natural outcome was a reluctance for both buyers and lenders to own or take security over properties subject to such ground rent provisions. Despite the prevailing argument that the owner purchased the property in full knowledge of the ground rent provisions (or should have done, if properly advised) and therefore remains contractually liable to pay these sums, the Government was put under significant media pressure to rectify the position. 

The current ground rent position 

The current position is that:

• Ground rent remains payable according to the lease terms;
• there is no statutory cap on the amount; and
• escalating or index‑linked rents remain lawful unless they breach consumer protection law.

The only major restriction to date is the Leasehold Reform (Ground Rent) Act 2022, which caps ground rent at a peppercorn for most new residential long leases, but existing leases are unaffected.

Ground rent continues to play a significant role in enfranchisement valuation and remains an important income stream for many freeholders and investors.

Key reforms proposed in the Bill

The key proposals in the draft Bill include:

1. A statutory cap on existing ground rents: Ground rent for most existing long residential leases will be capped at £250 per year, before ultimately reducing to a peppercorn after 40 years. This was confirmed by the Prime Minister in January 2026 as part of a “game‑changing shake‑up” of the leasehold system. This cap is expected to take effect by late 2028.
2. Ground rent reduces to a peppercorn after 40 years: After 40 years, ground rent would automatically fall to a peppercorn, removing the long‑term income stream.
3. In complex leasehold structures, the freeholder takes the brunt of the cap: The Bill contains a mechanism for intermediate landlords to reduce rent payable under their leases.
4. Enforcement and compliance: The Bill includes civil penalties and repayment obligations for landlords who charge above the cap.

Impact on landlords

The reforms will have wide‑ranging implications for freeholders, developers and investors, and concerns have been raised by stakeholders:

1. Reduced income: Capping ground rent and moving to a peppercorn after 40 years will significantly reduce long‑term revenue for landlords. 
2. Lower asset values: Ground rent portfolios are typically valued based on the income that they generate and escalating ground rents have historically been a key driver of portfolio value. A statutory cap is likely to reduce capital values, particularly where rents exceed £250 or escalate over time. This may have a detrimental impact on pension funds if their assets are devalued by this measure, which would ironically harm consumers financially.
3. Unintended consequences: A perhaps unintended consequence is that many Local Authorities will take a financial hit from the flow through mechanism for intermediate lease rent reduction, where they hold the freehold of development sites and had no input into ground rent levels.
4. Changes to enfranchisement value: Ground rent is a key component of enfranchisement valuation. With marriage value abolished under the Leasehold and Freehold Reform Act 2024 and ground rents capped, premiums are expected to fall. There may also be an adverse impact on freeholders where their income via the intermediate lease is reduced through the new reduction method. This could lead to the intermediate lease being at a negative rent and reduce the freeholder’s enfranchisement premium. Freeholders in that situation would effectively be penalised twice by the capped ground rent.
5. Voluntary lease negotiations: Landlords may find they have less commercial leverage in informal lease extension discussions, as leaseholders may prefer the statutory route. Additionally, some landlords have offered reduced premiums for the retention of rental income, but the cap appears to make no allowance for this.
6. Potential Consequences for Housing Delivery: Developers and institutional investors caution that weakening confidence in residential ground rent investments may reduce capital flows into new housing schemes. 
7. Distributional Effects and Market Distortion: Concerns have also been raised about unintended distributional impacts. The reforms may inadvertently transfer value away from domestic pension linked investment vehicles and towards international property investors, contrary to the policy’s stated aims.
8. Operational and compliance considerations: Landlords will need to ensure rent demands comply with the cap and that systems and processes are updated to avoid enforcement action.

What should landlords do now?

Although the Bill is not yet law, landlords should take steps to protect their position, including:

• Reviewing portfolios to identify leases with higher or escalating ground rents.
• Assessing financial impact, including income forecasts and asset valuations.
• Engaging with lenders where financing is linked to ground rent income.
• Updating internal processes to prepare for compliance with the cap.
• Monitoring legislative developments as the detail may evolve during the Bill’s passage.
• Engaging with government, particularly where unintended consequences arise.

Conclusion

The proposed reforms represent a major shift in the leasehold landscape and there are a number of unintended consequences for landlords, including those who are objectively innocent in the ground rent ‘problem’.

While the aim is to reduce costs for leaseholders, the impact on landlords will be significant, in particular, for those who have relied on ground rent portfolios as an income stream.

Early preparation and awareness of these changes will help landlords manage the transition and understand how the changes affect their portfolios.