Government's Ground Rent Cap Could Harm Leaseholders and Building Safety
The government's draft Commonhold and Leasehold Reform Bill, which proposes capping ground rents, has sparked significant concern among property experts and investors. According to Natalie Chambers, Director of the Residential Freehold Association, this intervention risks deterring investment in the property sector while potentially leaving flat owners to bear the financial burden of the building safety agenda.
Undermining Contractual Confidence
Governments in market economies typically exercise caution when interfering with existing contracts, and for good reason. Once this fundamental principle is weakened, restoring confidence becomes an enormous challenge. The proposed legislation does precisely this, with implications that extend far beyond leasehold policy alone.
Ministers have characterised ground rents as "money for nothing," an effective slogan that fails to reflect their actual function. Ground rents represent a form of rent that was agreed contractually and factored into property prices at the point of purchase. Institutional investors, predominantly linked to pension provision, have invested an estimated £15 billion in residential ground rents based on lawful, binding contracts.
Retrospective policymaking of this nature is rare in liberal democracies precisely because it corrodes investor trust. Markets can adapt to future regulation, but intervening retrospectively in established agreements carries wider consequences. The previous government's own impact assessment warned that overriding such contracts could trigger compensation costs exceeding £27 billion.
Financial and Safety Implications
At a time when the Treasury is already absorbing substantial liabilities from various sources, creating further exposure on this scale appears difficult to justify. Furthermore, in many parts of England and Wales, non-UK-based landlords and buy-to-let investors constitute the majority of leaseholders, exceeding 80 percent in some areas. This risks transferring value away from long-term domestic pension investment toward wealthy overseas property investors, an outcome that conflicts with the stated aim of protecting homeowners.
What makes this intervention particularly hard to justify is how little it delivers for leaseholders while ignoring their most significant cost pressures. Service charges have risen sharply in recent years and now represent the primary source of financial strain for many households. Capping ground rents does nothing to address this issue. Targeted reforms, such as regulating managing agents, improving transparency, and raising professional standards, would deliver more tangible benefits.
Building Safety Consequences
The consequences extend well beyond balance sheets. Capping ground rents risks pushing a significant number of professional freeholders into insolvency, with serious implications for the government's building safety agenda. Freeholders play a central role in the remediation programme, which spans up to 12,000 buildings at a projected cost of £22.4 billion. They can only meet their funding, insurance, and legal obligations while they remain solvent.
Those obligations are underpinned by income streams that the government's draft Bill now proposes to strip away retrospectively. This could stall remediation efforts and leave residents in unsafe buildings to shoulder responsibilities they neither sought nor are equipped to manage.
Lessons from Scotland
Scotland illustrates this risk clearly. Since leasehold was effectively abolished in 2000, more than 50 percent of apartments are now in a state of disrepair. This situation is driven by the fact that repairs must be funded collectively by flat owners and often require unanimous consent. In buildings with high levels of buy-to-let ownership, where many owners do not live on site, reaching agreement becomes even more challenging, leading to delays and, in many cases, legal action between neighbours simply to carry out basic maintenance.
This is not a question of whether leasehold should be reformed; it should be. However, retrospectively rewriting contracts for marginal gains appears misguided, particularly when the real pressures facing leaseholders remain untouched. Governments earn trust by being predictable, and markets invest where rules are clear and stable. By choosing blunt intervention over targeted reform, this draft Bill risks damaging both principles.
