The ground rent cap — winners, losers and those in between

Every reform has winners and losers. In this story, everyone already knows the cast: leaseholders good, freeholders bad, cap the rent — cue the applause.

The proposal is simple. Ground rents in existing long residential leases would be capped at £250 a year for 40 years, then fall to a peppercorn. It sounds administrative, but the government estimates a transfer of between £10 billion and £12.7 billion from freeholders to leaseholders.

Around 770,000 to 900,000 homes would benefit immediately, with 3.8 million affected over time. A transfer that large is never going to be tidy, so the real question is not simply who wins and loses, but who needed help and who actually receives it.

The clearest winners are homeowners who were sold flats with doubling ground rents, aggressive review clauses or rents rising beyond any sensible relationship with the property’s value. Many have found their homes impossible to mortgage or sell. For them, the cap is not a windfall, it’s a justified rescue.

Then there are the purchasers who knowingly accepted a higher ground rent for a lower price, and investors who bought with both eyes open. They will benefit too, because a blunt instrument cannot distinguish the trapped homeowner from the calculated risk taker. Yet the government says it has found little evidence that buyers commonly made that choice.

A single ground rent cap cannot distinguish between a harmful rent and one that is merely inconvenient. A ground rent of £250 is only 0.1% of a flat worth £250,000, but nearly 0.3% of one worth £90,000. The cap is simple, but bears more heavily on cheaper homes.

The obvious loser is the freeholder whose income has been capped. Few will mourn the loss, particularly where it arose from an aggressive or escalating rent. But it is important to describe honestly what is happening. The freehold is not confiscated, but a substantial part of its economic value is removed by legislation.

A fixed income of £250 a year for 40 years has a present value of roughly £2,400 to £3,800, depending upon the capitalisation rate adopted. Whatever the original ground rent stream was worth, the difference is transferred to the leaseholder.

The losers who deserve more attention are the ones nobody counts, the leaseholders who clubbed together to buy their own freehold through collective enfranchisement. They did what reformers spent years encouraging them to do, with some borrowing to fund the purchase, and many paying a premium reflecting the future ground rent income payable by flat owners who did not join in. The cap now reduces the value of the asset they were encouraged to acquire.

Consider too the leaseholder who paid a substantial premium to extend their lease and reduce the rent to a peppercorn. They had to find the money, pay professional fees and complete the transaction, whilst their neighbour may now receive the same ground rent outcome without the same upfront cost. There is an obvious lack of fairness in that distinction.

The greater concern may be what happens after the investment value has gone. A freehold is the legal wrapper around a block of flats, which may benefit from ground rent income, reversions and development potential, while also carrying responsibilities for insurance, enforcement, service charge collection and management.

In a well-run block, the loss of ground rent value may make little practical difference. But in a low value block, with defective leases, arrears and unresolved management problems, the freehold may already be difficult to operate. Remove most of its value and it can become an unwanted liability.

None of this is a defence of harmful ground rents, it is an objection to pretending that one number can produce justice in every case. And, of course, the government’s wider promise of cheaper enfranchisement is only of use to those who can afford it.

A reduced premium is still a premium, professional costs remain, service charge arrears may need to be cleared, and the leaseholder still has to find the money to pay the landlord. If a flat remains in negative equity after the event, there may be little financial incentive to proceed. Reform, like everything in life, is all very well, provided you can afford it.

The cap will rescue homeowners who genuinely need it. It will also hand windfalls to people who never did, devalue freeholds that leaseholders bought themselves, and in the weakest blocks strip value from a freehold until no one wants the job of running it. One number was never going to tell them apart.

Mark Wilson is a director of Myleasehold and a member of ALEP (the Association of Leasehold Enfranchisement Practitioners).