On 27 January 2026, the Government announced its intention to introduce a statutory £250 per year cap on ground rents for all existing residential long leases, with a further reduction to a peppercorn after 40 years. This forms part of the draft Commonhold and Leasehold Reform Bill, now entering pre-legislative scrutiny.
This announcement marks a significant expansion of leasehold reform and has important implications for leaseholders, freeholders and institutional investors. Below is a clear summary of the position based on current information.
What Has Been Announced?
The Government has stated that, subject to legislation:
- Annual ground rents on existing leases will be capped at £250 per year.
- After 40 years, those capped rents will reduce to a peppercorn.
- The intention is to provide fairness for leaseholders and remove the financial burden of high or escalating ground rents.
- The proposal applies to existing leases, not just new ones.
This is a substantial shift from earlier reforms, which allowed landlords to collect existing contractual ground rents within the lease.
How Does This Compare With the 2024 Reforms?
This is a key point often misunderstood in recent commentary.
The Leasehold and Freehold Reform Act 2024 introduced a cap on ground rents for valuation purposes only when calculating statutory lease extension and enfranchisement premiums.
Under the 2024 Act:
- Ground rent used in valuation calculations is capped at 0.1% of freehold value.
- This affects how the premium is calculated.
- It does not change the actual contractual rent payable by the leaseholder.
In other words, leaseholders continued paying the ground rent stated in their leases, but valuers had to treat future rents as capped within the statutory formula.
2026 Proposal (Draft Bill)
The new proposal goes significantly further:
- It caps the actual ground rent payable under existing leases at £250.
- It then transitions that rent to peppercorn after 40 years.
- It applies universally unless specific exemptions are carved out during the legislative process.
This is not a revision to the valuation mechanism. It is a direct alteration of contractual rent obligations.
This marks the first time the Government has proposed intervening directly in the rent terms of existing residential leases on a blanket basis.
What Does This Mean for Leaseholders?
If legislated in its current form, leaseholders may benefit from:
- Lower annual ground rent costs where current rents exceed £250.
- Improved mortgageability in cases where escalating rents have previously caused lender reluctance.
- More predictable long term costs, particularly with the shift to one peppercorn after 40 years.
Leaseholders considering extending their lease may wish to seek advice on timing, as upcoming reforms may affect statutory premiums.
Implications for Freeholders and Institutional Investors
This proposal has more complex consequences for freeholders, particularly those with investment backed ground rent portfolios.
Any contractual ground rent above £250 will be overridden. Indexed or stepped rents will also be constrained.
This may reduce:
- annual portfolio income,
- ground rent capitalisation values, and
- valuation outcomes in statutory claims.
Some larger freeholders and pension backed investors have bought ground rent portfolios using long term finance arrangements. If ground rents are capped, the income they receive could reduce, which may affect:
- their ability to meet the financial terms attached to those arrangements,
- how comfortably the income covers their repayments,
- how easily they can renew or refinance those arrangements in future, and
- the overall value of those ground rent investments.
Potential Legal and Constitutional Challenges
LAFRA 2024 is already subject to ongoing judicial proceedings. The courts have recently required claimants to provide detailed evidence on pension fund and investor impacts, indicating that financial consequences form a material part of the legal analysis.
A reform which directly reduces contractual income may therefore face scrutiny under Article 1 of Protocol 1 (A1P1) property rights principles, and its interaction with existing appeals remains an important factor.
Market and Valuation Considerations
At this early stage, the exact market impact is uncertain, but the following trends are highly likely:
- Investors will reassess the attractiveness of UK ground rent assets.
- Lenders may revisit risk models for portfolios dependent on rent income.
- Valuers will need to prepare to quantify the impact in order to properly advise
Existing statutory frameworks under the 1993 Act and related case law remain in force until new legislation is enacted.
Next Steps
The proposals form part of a draft Bill, which will undergo:
- pre-legislative scrutiny,
- parliamentary debate,
- potential amendment,
- and secondary legislation setting out implementation details.
The Government has indicated long implementation, with changes potentially coming into effect by 2028.
Further clarification is expected later this year.
Should Leaseholders Wait Before Extending Their Lease?
A natural question arising from the proposed cap is whether leaseholders should delay pursuing a lease extension until the reforms come into force. While it may be beneficial for some leaseholders to wait, particularly those paying ground rent significantly above £250, it is important to recognise that this is not a universal position.
In our view, leaseholders broadly fall into three groups:
Leaseholders Paying Ground Rent Above £250 per Year
For those paying ground rents above the proposed cap, it may be sensible to wait for further legislative clarity, as the term element in the premium calculation would reduce once the cap is applied.
However, it should be noted that:
- The cap is not yet law
- No implementation date has been finalised
- The Bill may be amended during Parliamentary process
- Existing statutory valuation methods still apply until the new legislation is fully enacted
- Deterioration of your lease may result in marriage value being payable
Leaseholders should therefore consider both legislative timing and the continuing impact of an unexpired term that is diminishing each year.
Leaseholders Already Paying £250 or Less
Where current ground rent is already at or below £250, there is little financial benefit in waiting. These leases are unlikely to experience any reduction in the term value because the ground rent is already within the proposed statutory threshold.
For this group, delaying may result in:
- a shorter unexpired term
- a higher relativity adjustment over time while marriage value remains payable
- larger future premiums
- potential issues with mortgageability if the term falls further
Proceeding under the current statutory regime may therefore remain appropriate.
Leaseholders With Lower Current Rents but Higher Future Reviews
Some leases contain stepped or indexed review provisions that will take the rent above £250 in the future. It is easy to assume that waiting would produce a saving, but this is not always the case.
This is because:
- Future rent increases often occur decades ahead
- The valuation process discounts these increases to present day value
- As a result, the portion of the premium attributable to future stepped rents is often relatively small
- In many cases, it represents only a fraction of the overall premium
Therefore, even if future rent reviews are capped under the proposed legislation, the practical impact on the statutory premium amount today may be very minimal. This means that whilst waiting for the rent cap to be enacted, the reduction in term will attract more in reversionary or marriage value premium than you will stand to save by a capped £250 ground rent.
For those in this category we recommend seeking advice before deciding to delay.
Balanced View
While the proposed cap could influence the timing decision for some leaseholders, the legislation is not yet in force, and the effect will vary depending on:
- current ground rent
- whether review clauses exist
- the number of years left on the lease
- the impact of marriage value
- premium sensitivity to discounting
- individual lender requirements
In many cases, particularly where the current rent is £250 or below, or where the uplift to the premium is marginal due to discounting, it may be more advantageous to proceed now rather than waiting for the reforms to be implemented.
We encourage anyone impacted either positively or negatively to seek advice as the correct approach will depend on individual circumstances.
Need advice or have further questions? Get in touch at info@morgansloane.co.uk