Government proposals to cap ground rents paid by leaseholders at £250 a year would "seriously damage investor confidence in the UK housing market" and risk unnecessary economic harm unless reviewed, property industry leaders warn.
Earlier today Sir Keir Starmer announced long-awaited plans to shake up what the government labelled an "outdated leasehold system", introducing a cap on the annual amount leaseholders pay to their freeholder in England and Wales. There had been expectations the government would drop the cap.
Under plans set out in the draft Commonhold and Leasehold Reform Bill, ground rents will be all but phased out, changing to a peppercorn cap after 40 years. The sale of new leasehold flats will also be banned.
The government is also looking to strengthen homeownership through measures such as the abolishment of forfeiture. This is where leaseholders can lose their home and the equity they have built up in a property by defaulting on a debt as low as £350.
While the government argues the reforms could save some families more than £4,000 over the course of their lease, a number of property groups have warned the changes will seriously disrupt investment into the sector.
Impact on freeholders
Danny Pinder, director of policy at the British Property Federation, said in a statement: "While we agree that rapidly escalating ground rents should be addressed, the proposed cap will interfere with investments made by pension funds and institutional investors over many years and undermine the government's pursuit of investment in this country.
"The various documents published by the government today make clear that these changes will have an impact on freeholders, the value of their assets and their ability to match index-linked pension liabilities, but that they intend to proceed, nonetheless.
"We have long been clear that adequate compensation must be provided to these entities as they have invested in good faith in order to meet their liabilities and continue to fund everyone’s pensions, today’s announcements is silent on that point.
"There are billions of pounds invested in large-scale residential and mixed-use developments, and it is essential that reform is mindful of the rights of property owners as well as leaseholders."
He added: "In our legal system, contract is sacrosanct and legislative changes that cut across and undermine existing commercial agreements will raise the risk premium that investors attach to the UK at a time when the government is seeking to attract domestic and private capital for its growth agenda.
"We want to work with government as the Bill goes through the legislative process to ensure that unnecessary economic harm is minimised."
"...legislative changes that cut across and undermine existing commercial agreements will raise the risk premium that investors attach to the UK..."
A spokesperson for the Residential Freehold Association, a trade body representing the UK's largest freeholders, added: "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.
"Property rights and contract law are fundamental drivers of domestic and global investor confidence in the UK. 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.
"This is, despite the previous government’s own impact assessment showing compensation could exceed £27 billion. The resulting forced exit of professional freeholders from the sector, will hinder building safety projects and disrupt the day-to-day lives of residents.
"We urge the government to instead focus on the reforms that would achieve real world benefits for leaseholders which they care most about, such as regulating managing agents, improving transparency and raising professional standards."
Feudal leasehold system
Today's announcement of leasehold system reforms follows pledges made in Labour's election campaign to bring an "end to the feudal leasehold system which dates to medieval times".
The government argues that more than 5 million leaseholders and future homeowners will benefit from "stronger control, powers and protections" included in the draft Bill.
Ground rents have already been eliminated for new leases agreed after the leasehold reform came into force in 2022, with today's announcement focusing on ground rents in older leases. The cap is expected to be in place by late 2028, subject to parliamentary timings.
One of the UK's largest asset managers, M&G, said in a stock market announcement this morning that it is directly exposed to £722 million of ground rent assets through its Prudential Assurance Company shareholder fund.
Should the proposals come into force, M&G said the write-down in valuation of its relevant assets is expected to lead to a circa £230 million one-off reduction in the Group Solvency II Own Funds, while it expects a circa £15 million reduction in annual adjusted operating profit and underlying capital generation.
Andrea Rossi, M&G group chief executive, added: "M&G fully supports the government's objective to strengthen leaseholder protection and tackle remaining egregious ground rents. However, we are disappointed that we have not been able to agree a proportionate solution that works for all parties.
"The strong financial position of M&G and our thoughtful planning mean that we are well positioned to absorb and manage the negative impacts generated by this proposed legislation.
"Thanks to the quality of our business model and our disciplined approach to capital management, we today reconfirm the adjusted operating profit growth and capital generation targets announced in March 2025, and our existing progressive dividend policy."
RICS chief executive Justin Young also said: "Today’s announcement offers greater certainty and clarity on the government’s proposed reforms to the leasehold system, including long-awaited action on ground rents.
"The publication of the draft Commonhold and Leasehold Reform Bill is a critical step in this process. RICS looks forward to working with members, MHCLG, and other key stakeholders to deliver the best outcomes for consumers and the market."
More flexible tenure
As part of the government's work to overhaul the system, it is looking to create a new process to make it easier for existing leaseholders to convert to commonhold, where homeowners will receive a stake in the ownership of their buildings and be "given a stronger say" in how their building is managed and the bills they pay.
"The reinvigorated commonhold system will ensure it works for all types of developments, as well as mortgage lenders, with strong management rules in place around repairs and leadership, and greater rights for homeowners," the government said.
Caroline Wild, counsel, real estate disputes, at Forsters law firm, said in a statement: "The leasehold system has long been lambasted and so the reinvigoration of a more flexible tenure, such as commonhold is welcome.
"That said, it may not be the silver bullet that leaseholders are hoping for. Commonhold is still a form of communal living and a lot of the challenges leaseholders face under the current system will persist under a new tenure.
"Introducing commonhold in phases seems to be the most workable option..."
"Introducing commonhold in phases seems to be the most workable option, especially if the government chooses to start with new developments initially, as this will enable all parties and the market to become familiar with the structure. Essentially it will operate a stress-test to understand how the mechanics could be rolled out for wider conversion from leasehold to commonhold.
"Careful consideration needs to be given to the legal and practical aspects of how commonhold can be implemented in complex developments, especially in schemes with a mix of residential and commercial space."
She added: "Key to the success of commonhold will be the upskilling of professionals such as conveyancers, managing agents and lenders so they understand the nuances of commonhold and perhaps more importantly, arming leaseholders with sufficient knowledge and ensuring expectations are managed, not only in relation to the rights that commonhold will afford but the responsibilities and limitations also."