Ground down

As the legislative noose tightens around the neck of ground rents, reversionary investment values are starting to gasp for air…

That probably sounds quite melodramatic but the squeeze on ground rents has been relentless since The Leasehold Reform (Ground Rent) Act 2022 banned ground rents for almost all new long residential leases. It sets the financial value effectively to zero.

Then came the Leasehold & Freehold Act 2024 (LAFA), which notionally limits ground rents at 0.1% of capital value for the purpose of calculating the compensation to freeholders, for ground rents to be foregone on extension or enfranchisement. NB this has not yet been implemented, pending secondary legislation, and is currently being challenged by landlords through the courts.

And the third horseman of the ground rent apocalypse is the Commonhold & Leasehold Bill announced in the 2026 King’s Speech to parliament which sets to cap ground rents in all leases at £250 by 2028 and reduce them to a peppercorn (nil) after 40 years. There aren’t many examples of government changing/restricting the actual terms of legal agreements between individuals so we expect this will also face stiff challenges in its journey toward the statute books.

That all sounds quite tortuous but nothing reads the room faster than market sentiment and two tiers are emerging under the pressure of higher interest rates, which are bringing values into sharp focus. Those freeholders who see the writing on the wall or need to sell are already accepting values reflecting much higher capitalisation rates than previously (often double digit). But Valuation Tribunals considering disputed are still hearing arguments for 6-7% cap rates and reversionary values based on ‘relativity tables’ researched by Savills in 2016-7.

How does this affect lease extensions and enfranchisements? For landlords it means you should maybe consider offering voluntary extensions while there is still some buoyancy in the market.

For leaseholders it means that a market correction is already pricing-in proposed statutory changes to some extent, which may counter any advantage in holding back. LAFA’s 990 year lease extensions based on capitalisation of ground rents capped at 0.1% of capital value may be some way off but if you need to sell, remortgage and/or wish to take greater control of management then affordability has already improved and maybe now is the time.