Modern, open plan apartment with dining table to left and granite kitchen counter to right, with seating and TV beyond and open courtyard accessed via sliding doors in background

Categories: government and politics | buy to let mortgages

At the end of January, the government announced their plans to cap ground rents paid by leaseholders at £250 per year in England and Wales. This is expected to come into force by late 2028.

Published as part of their draft Leasehold and Commonhold Reform Bill, which is currently moving through the House of Commons, Labour aim to fulfil their manifesto promise: to tackle “unregulated and unaffordable ground rent charges”. 

While announcing the cap on Tiktok, Sir Keir Starmer said that it could save some leaseholders “hundreds of pounds”.

“Feudal” leaseholds being phased out

While ground rents were abolished for a majority of newly established residential properties back in 2022, most existing properties still have them.

The upcoming £250 ground rent cap represents an important stepping stone in Labour’s overarching goal to phase out “feudal” leasehold tenures entirely, in favour of building new flats under commonhold tenures. 

Commonhold is a form of property ownership for flats and similar building types that allows individuals to own a unit indefinitely, without having to worry about a freeholder or ground rent. 

Currently, those owning property in this kind of structure are automatically enrolled in a commonhold association. These associations are composed of other “unit owners” in the same communal spaces, i.e. the owners of each flat in a single block.

Existing leaseholders will be able to move over to the new commonhold system once Labour’s phasing-out of leasehold ground rents gets underway.

By bringing in the £250 cap, Labour claim that ground rents will be reduced to a peppercorn – effectively nothing – after 40 years, which could save leaseholders up to £4,000 in the long run. 

Impact on landlords and property investors

Leases often contain clauses where the ground rent will increase by a certain percentage, or aligned with UK RPI (Retail Prices Index) inflation at fixed intervals.

This can be a barrier for leaseholders looking to sell or mortgage their properties. As such, ground rent being capped at a manageable level may make the task of selling slightly easier for leaseholders. 

Mortgage lenders have other sensitivities surrounding ground rent and service charges on a property. In particular, some are hesitant when these are worth more than 1% of the property value.

The £250 ground rent cap is therefore excellent news for landlords of lower-value properties, which may have ground rents that currently exceed the typical 1% limit.

Right here, right now

As said, the ground rent cap will not be enforced until 2028 at the earliest. With the deadline being relatively distant, some landlords and investors may need faster solutions to ground rent-related issues preventing them from getting a mortgage.

Currently, there are lenders that are willing to assist when the ground rent and service charges exceed 1% of the property value.

Pinpointing these more lenient lenders can be challenging, especially when so many are likely to decline. 

At Commercial Trust, we have expert advisors on hand that can handle complex cases and find suitable lenders.

For any buy to let mortgage, commercial mortgage, bridging loan or development finance enquiries, contact us today. Our team will be happy to provide advice, regardless of the complexity of your situation.