The Government has today published its consultation seeking views on capping ground rents in long residential leases in England and Wales. The consultation is entitled “Modern leasehold: restricting ground rent for existing leases”. The consultation period is 6 weeks and the consultation period will close on 21 December 2023.

In June 2023, the Leasehold Reform (Ground Rent) Act 2022 was brought into force which caps the ground rent to zero in most new residential long leases of a single house or a flat from 30 June 2022. From April 2023, this was extended to new long leases of retirement properties.

The options proposed by the Government for capping ground rents in existing leases are wide ranging and could substantially alter the terms of those leases. The five options proposed by the Government are:

Option 1 – Capping ground rent at a peppercorn (zero ground rent);

Option 2 – Capping ground rent at an absolute maximum value. The maximum value is to be determined but is proposed at £250 per annum;

Option 3 – Capping ground rents at a percentage of the property value. The current proposal is 0.1% of the property value;

Option 4 – Capping ground rent at the original amount it was when the lease was granted; or

Option 5 – Freezing ground rent at current levels.

The Government is also considering whether if a cap is imposed, it should be able to be reviewed in the future to be increased by a fixed increment or linked to indexation, where appropriate (not for options 1, 4 or 5).

They are also consulting on any transitional period before implementation of any proposals. The Government intend to implement any cap on ground rents by overriding lease terms through legislation rather than varying clauses and intend for any costs incurred by the freeholder in implementing the changes to be borne by them (subject to the views of consultees).

The Government intend to implement an enforcement regime around any ground rent cap, as it has done with the Leasehold Reform (Ground Rent) Act 2022 through fines administered by the local authority.

The Government is proposing a number of exemptions to any ground rent cap to include leases granted for less than 21 years, where the current freeholder can prove they have negotiated an agreement resulting in the current leaseholder not having to pay a premium, community-led housing, rent to buy and business leases.

This consultation has potentially huge ramifications for the residential property industry. The Government’s proposals seek to fundamentally alter the contracts which have been entered into between landlords and tenants. In addition, there is a lack of information about how the Government intends to change the valuation for statutory lease extensions of flats which would be significantly impacted by these proposals. Under the current valuation basis, part of the premium payable on a statutory lease extension claim is calculated on loss of ground rent and an element of the premium amounts to the loss of that ground rent to the freeholder. However, if ground rents were to be capped that element of the premium would be redundant and freeholders would receive no compensation for that element. Freeholders include a wide range of stakeholders such as urban estates, local authorities, charities and institutional pension funds. The impact of the loss or even the reduction of ground rent could have far-reaching consequences.

Freeholders, investors, leaseholders and other stakeholders in the industry will no doubt want to have their say on this consultation, given its significance and potentially large ramifications on existing arrangements. Details of responding to the consultation can be found here but those intending to respond will need to act quickly as the consultation closes before Christmas, on 21 December 2023.