Ground rent reform - implications of the £250 limit

Ahead of his visit to MIPIM next month, Darren Hamer (Head of our Manchester Real Estate team) continues his consideration of the big issues currently affecting the real estate sector, looking this week at the government’s recent proposals to curb ground rents in existing long residential leases.

Introduction

The Government’s proposal – announced on 27 January 2026 - to limit ground rents on leasehold homes to £250 per annum (and eventually abolish them altogether) represents a significant intervention in the residential property market. While the reform is primarily framed as a consumer protection measure for leaseholders, it has material implications for landlords, freeholders, investors and mortgage lenders. This article considers the impact of the proposed £250 cap from the perspective of landlords and lenders, focusing on income, valuation, lending risk and market behaviour.

Background and legislative context

Ground rents have historically provided a predictable income stream for residential freeholders, often underpinning long-term investment strategies and securitisation models. Although the Leasehold Reform (Ground Rent) Act 2022 effectively abolished ground rents in most new residential leases, existing leases were left untouched. The proposed cap seeks to address this by limiting ground rents in existing long residential leases to £250 per annum, with a longer-term transition to a peppercorn rent after 40 years. The cap is expected to take effect in or around 2028, subject to parliamentary process and any legal challenge.

Impact on landlords and freeholders

1. Loss of income

   For landlords and professional freeholders, the most immediate impact of the cap will be a reduction in ground rent income where existing leases reserve rents above £250 or include escalation mechanisms. Unlike statutory lease extensions, the proposed reforms do not include a compensation regime. This is likely to result in a material write-down of income projections, particularly for portfolios acquired or valued on the basis of long-term indexed or doubling ground rents.
    

2. Effect on asset values

   Ground rent portfolios are commonly valued on a yield basis reflecting future income streams. A statutory cap will inevitably depress capital values and may render some investment models unviable. It may also place the landlord in breach of its banking covenants, as discussed further below from the lender’s perspective. This may prompt restructuring of portfolios, disposals, or a shift in focus toward reversionary value and redevelopment potential rather than income yield.
    

3. Potential for legal challenge

   Industry bodies and institutional investors have raised concerns that the cap constitutes an unjustified interference with existing contractual and property rights. There is a real prospect of human rights challenges, particularly under Article 1 of the First Protocol to the European Convention on Human Rights. While the Government has sought to mitigate this risk through a transitional period, uncertainty remains.

Impact on lenders and secured finance

1. Valuation and loan-to-value considerations

   In the short term, lenders with security over freehold or headlease interests may see a reduction in the value of that security due to lost income. This may have implications for loan covenants, refinancing and portfolio-level funding arrangements, particularly where lending was predicated on ground rent income. However, we would be surprised if this was a major issue for lenders because Government intervention on this issue was always likely for political reasons (and was also promised by the previous Government) and therefore we would have thought that this would have been factored into account by lenders’ valuers.
    

2. Improved lending security

   From the perspective of lenders taking security over the occupational interest (rather than the landlord’s interest), the cap is likely to be broadly positive in the medium to long term. High or escalating ground rents have historically affected mortgageability, delayed transactions and required indemnity insurance or lease variations. A universal cap reduces these risks and simplifies underwriting for both residential and buy-to-let lenders. The cap also removes the reputational risks that have until now made lenders reluctant to become associated with those developments with highly-escalating rents.

    

3. Removal of enforcement risk

    Historically, ground rents exceeding £250 per annum outside London (or £1,000 in London) created a risk that long residential leases could fall within the assured tenancy regime under the Housing Act 1988, exposing lenders to the risk of mandatory possession for rent arrears (especially if the lease does not contain a mortgagee protection clause). While this issue has now been resolved by the Renters’ Rights Act 2025, the cap eliminates the high-rent scenarios altogether and removes this issue requiring insurance or in the case of some lenders, requirements for deeds of variation to be entered into before a loan is made.

Conclusion

For landlords and lenders, the proposed £250 ground rent cap represents a fundamental change in the risk and return profile of residential freehold ownership. While it may improve transactional efficiency and reduce lending risk in the residential market, it also undermines established income-based investment models and is likely to lead to reduced asset values and strategic realignment. Those with exposure to residential ground rents should review portfolio valuations, financing arrangements and long-term strategy in anticipation of the reforms coming into force.

HD at MIPIM

We’re counting down to Cannes and can’t wait to be back at MIPIM 2026!

An 11-strong team from across our UK offices will be attending, bringing together expertise in real estate, real estate finance, banking, construction and private client law.

We’d love to catch up with fellow professionals, have some great conversations and see how our legal expertise can help support your strategic goals. If you’re heading to MIPIM too, do get in touch.