ALL LEASEHOLDERS MUST FILL OUT THIS GOVERNMENT CONSULTATION AND THERE IS A GUIDE BELOW
The cod Latin quid pro quo leases means where a higher ground rent is specifically agreed in return for a corresponding reduction in purchase price
Millionaires in central London paying, say, £40,000 ground rent on a short lease. Or, all cases where leaseholders have signed informal lease agreements with higher ground rents
But freeholders maintain the fiction that ALL leases are really quid pro quo: leaseholders bought the properties for less because they pay out annual ground rent to them
Government’s instinct is to consider exceptional cases, but creating an exemption for quid pro quo leases – beyond those identified and remedied by the Law Commission – risks years of litigation, uncertainty and opportunities for abuse
By Liam Spender
On 2 July the government announced a consultation on whether quid pro quo leases should be exempt from its proposed £250 ground rent cap, expected to apply from 2027.
The government proposes that any quid pro quo lease be exempt from the £250 ground rent cap. The ground rent payable under such a lease will nevertheless drop to a peppercorn (zero monetary value) 40 years after the new law comes into force, so around 2067. The consultation is silent on whether any increase in ground rent would still apply during this 40-year period.
Quid pro quo leases and the ground rent cap
We are seeking views on whether ‘quid pro quo’ leases should be exempt from or treated differently in the government’s proposed cap on ground rents in residential leases.
People should be quick to see through the Latin jargon. The deployment of legal Latin is usually a sign that something is not as it seems, lending legitimacy to the illegitimate. A quid pro quo lease is a lease granted at less than its full value. In practical terms, a lease granted with a lower premium and a higher ground rent than would otherwise be the case.
The government is consulting on whether there should be an exemption based on the alleged true value of a lease by reference to the original premium and ground rent paid. That is going to be a slippery concept to translate into statute.
And statutes that embody slippery concepts are ripe for attack by freeholders in the future. There is no easy way to administer an exception that relies on proving that prices and ground rents paid years ago were set at the right level.
Trying to create exceptions risks distracting from the simplicity and certainty of the £250 ground rent cap.
If one believes the freeholders, then every single lease is granted on a quid pro quo basis because, in their telling, all of these leases cost less than buying the freehold and / or because the capitalised value of the ground rent equals or exceeds the difference between the true value of the lease and the premium actually paid.
The government rejects this assertion. The consultation says the government “has not seen convincing evidence of this”. That reflects the 2020 findings of the Competition and Markets Authority’s (CMA) review of the housing sector, which said there was no justification for ground rent.
The government and the CMA are right. There is little market evidence that in most leases the ground rents come close to reflecting any reduced premium. Ground rent terms are not negotiated when flats are sold new.
To avoid having to offer the freehold of a newly built block of flats developers will structure the sale of the freehold so that the leaseholders never get a look in. That means the developer cannot negotiate the ground rent terms, because it has already sold the right to that income to a third party.
Individual flat buyers also have no pricing power relative to developers selling blocks of flats.
If one prospective buyer will not buy a new flat on the developer’s price terms then the developer usually can rely on finding someone who would. It is not uncommon for developers to refuse to negotiate any terms of the lease, including but not limited to those relating to ground rents.
It is also not uncommon to see ground rents explained on the face of a lease to have been set by reference to something having nothing to do with the premium paid.
Common examples include the number of bedrooms or floor area, with ground rents set in bands on a rising scale.
It is also not uncommon when flats are sold new for the buyers of neighbouring flats of very similar, if not identical, configuration, to pay a significantly different premium, yet still be charged the same ground rent.
If ground rents were actually negotiated terms, we would expect not to see these patterns. The Financial Conduct Auhtority (FCA) also found in 2017 that there was no evidence that leasehold houses had been sold for less than their freehold equivalents.
At the other end of the market, when people are extending short leases of flats, it is also not uncommon that people do not complete the statutory lease extension process, which always reduces a ground rent to a peppercorn.
Instead, in the interests of quick deal, they agree a deal that continues an existing ground rent, or which imposes a higher ground rent.
There are many stories of unscrupulous freeholders, Martin Paine being one example, offering seemingly benign ground rent terms only for leaseholders to find later that the changes have been backdated decades and they face bills of thousands of pounds a year in ground rent. Leaseholders then found they had to pay tens of thousands of pounds for a statutory lease extension to remove these terms.
The story of leasehold is of statutory interventions designed to protect leaseholders being turned against them.
A long-standing example is section 146 of the Law of Property Act 1925.
This was intended to help leaseholders by requiring a landlord to serve a notice of breach before it could forfeit a lease. It was supposed to help leaseholders avoid forfeiture. The provision has been turned against leaseholders.
Many leases will contain clauses allowing a landlord to recover all of its costs of preparing and serving a section 146 notice from the leaseholder. This leads to leaseholders with small unpaid debts racking up thousands of pounds in legal and administration fees.
It also makes commencing the forfeiture process the first port of call for freeholders and their agents, because of the favourable costs regime.
All that to say that enacting a law is only one part of the legal solution. How that law is interpreted and applied by the courts in practice is the more important aspect.
Creating an exemption for quid pro leases is fraught with difficulty.
In all fairness, the government recognises this in its consultation, proposing various safeguards.
The real danger is that it will not be able to translate these good intentions into practical and effective safety for leaseholders.
There is a real danger that all of the iniquities of the current leasehold system could continue to persist even after the Leasehold and Freehold Reform Act 2024 and the promised Commonhold and Leasehold Reform Act are brought into force.
Set out below are some thoughts on the consultation proposals people may like to use to frame their own responses to the consultation.
The safest approach is to limit any quid pro quo exemptions only to those types of lease previously identified by the Law Commission and with a strong and practical enforcement mechanism to prevent freeholders taking advantage of leaseholders.
GUIDE TO THE QUID PRO QUO LEASES CONSULTATION
What is the consultation asking?
The consultation contains 38 questions asking about all the different features of potential exemptions.
As always, it is important that leaseholders complete the consultation. The responses are likely to be dominated by surveyors, freeholders and lawyers.
Their interests do not align with leaseholders’ interests. The risk is that responses to the consultation are dominated by those with a vested interest in keeping things as expensive and complicated as possible. The government will likely use the responses to the consultation as its evidence base for any decision it makes.
The consultation runs until 27 August 2026.
Responses can be filed online here:
https://www.gov.uk/government/consultations/quid-pro-quo-leases-and-the-ground-rent-cap
Why is there another consultation?
Leaseholders will be tired of government consultations, which seem to come along more frequently than the average bus.
Unfortunately, this is part and parcel of the way the government operates.
Consultations are used to gather evidence and test options. They are also an important part of the government resisting inevitable legal challenges from freeholders aggrieved at the £250 ground rent cap.
If the government goes ahead without consulting it makes it harder to show it has balanced the interests of all parties affected by its decisions.
More unfortunately still is that it appears the government has no, or at least no reliable, data on how many quid pro quo leases may actually exist. It therefore risks legislating for something that is not a significant issue.
Where have references to quid pro quo leases come from?
While wrapped in the pseudo-legitimacy of legal Latin, there is no evidence of anyone using the term “quid pro quo lease” before late 2025.
Only then did it start to crop up in arguments being made by large ground rent investors and their surrogates.
It then featured in evidence submitted to the recent Housing, Communities and Local Government Select Committee’s pre-legislative scrutiny of the draft Commonhold and Leasehold Reform Bill.
The concept has been around longer, however.
In its 2020 report on reducing the price payable for leases, the Law Commission’s 2020 report “Options to reduce the price payable” referred to the fact that there may be a small minority of leases that should be treated differently.
The Law Commission identified only a handful of unusual situations where treating leases differently might be justified, principally long leasehold houses with modern ground rents, individually negotiated Prime Central London leases and leases granted at a genuine market rent. Those are all exceptional cases.
The current consultation risks creating a much wider category.
One good argument is to ask why the Law Commission’s three exemptions are not enough.
Why is the government seeking to create new exemptions now, presumably only as a result of the vociferous ground rent lobby? Why complicate something that should not be complicated?
What is a premium and a ground rent?
Before 2022 new build flats and houses were sold on leases, for terms typically ranging between 99 and 999 years. Mostly this involved the buyer paying a large lump sum – the premium – in exchange for the grant of the lease.
Among other terms, the lease also often obliged the buyer to pay an annual sum, a ground rent. These ground rents often rose.
A major scandal, exposed by LKP, gained public attention from 2016 because some developers set ground rents that rose aggressively.
People found that these properties were no longer saleable because they could not be mortgaged.
This is what prompted the CMA to look at the market in 2017. Between 2020 and 2022 some of the largest developers gave undertakings to pay hundreds of millions of pounds to rectify terms that saw some ground rents double as frequently as every 5 years.
Ground rents evolved from symbolic payments – a peppercorn or even a rose in older florid leases – to fixed monetary sums and eventually to terms doubling every five years. That evolution itself undermines the claim that they were simply another way of paying the purchase price.
What is a capitalised ground rent?
A capitalised ground rent is the value of all of the annual payments converted to a lump sum paid today.
This rests on two principles. First, that money in hand today is worth more than a promise of money paid in the future. We call this the time value of money. The second is that a cash lump sum can be invested. If a lump sum is invested at the correct rate then, thanks to the benefit of compounding, it will produce the total income that would have been received from the annual payments over time.
Mathematically, this calculation is performed by applying a discount rate to the separate income streams. The typical discount rate (called the capitalisation rate) used to calculate the capitalised value of ground rents varies between 5% and 7%, but in some cases it has gone as low as 3.5%.
The effect of small changes in the capitalisation rate on the lump sum value of ground rents is dramatic.
To give a simple example, a payment of ground rent of £100 once a year over 125 years discounted at a rate of 5% has a capitalised value of roughly £2,000 if paid as a lump sum today. The freeholder would be able to take that lump and invest it, benefiting from compound returns, to produce the equivalent of 125 x £100 over 125 years, so the lump sum is not £12,500.
If we change the capitalisation rate to 7% to our example above then the value of the capitalised ground rent falls to about £1,430. The value is lower at a higher capitalisation rate because returns on a lump sum investment will compound at a higher rate over time, so less money is needed at the start.
How does a capitalised ground rent relate to the premium?
In the freeholders’ telling, the first buyer paid a lower premium because it agreed to defer part of the up-front price by way of ground rent paid annually.
As mentioned at the head of this article, it is a nice theory but one that does not accord with practice.
If the freeholders were right then we would expect to see in every case that the capitalised value of the ground rent broadly reflected the difference between the premium paid and that capitalised value. We do not see that.
Indeed, some might say it defies business common sense to suggest that developers set their prices at anything other than the highest they think the market will pay, ground rent or not.
Nor is it plausible to suggest that developers employ slick sales suites and have people in them carefully working out what the premium should be by reference to the capitalised value of the ground rent.
These calculations are not mental arithmetic. And how many developer sales teams would turn down offers of £110,000 or £120,000 for the flat in our example saying: “Sorry, we can’t accept that because it doesn’t reflect the capitalised value of the ground rent.”
Will their bosses not be putting them under pressure to meet particular sales targets every week? Or under pressure to achieve an average sales price? As everyone who has ever bought a new flat or house will understand, the developer has all of the pricing power. If you will not buy the property at the price and on the terms the developer wants then someone else will.
Important also to remember is that many developers steered people to their chosen solicitor. These solicitors were under pressure to hold the line on changes to lease terms and to speed through sales as quickly as possible.
There are reported examples of solicitors who failed to warn buyers what they were getting into when agreeing to the ground rent terms.
Even where buyers chose their own solicitor, it is unlikely much before 2015 or so that the solicitor would have been expected to advise on ground rent terms or how they would affect the long-term saleability over the property. Many solicitors advising before doubling ground rents became an issue would have regarded that as a commercial question for the client and not a legal question for the solicitor to answer.
As also mentioned above, it is vanishingly unlikely that any developer has ever negotiated a ground rent because a buyer offered to pay more.
As explained above, the developer will usually have no ability to negotiate ground rent terms because it will already have agreed to sell a particular level of ground rent income to a ground rent investor, probably even before the first flat was built.
Why is the focus on what the leaseholder paid for the lease instead of what the freeholder paid for the right to receive the ground rent?
A significant flaw in the government consultation is that it assumes that the freeholder has, in fact, paid full value for the right to receive the ground rent in the first place.
In other words, it assumes the price paid by the freeholder matches the capitalised value of the ground rent income received.
That is not necessarily the case.
Many freeholders acquired their ground-rent portfolios decades ago, when investors paid considerably less than the prices achieved immediately before the 2022 reforms. A ground rent investor complaining that a leaseholder has a quid pro quo lease who does not satisfy the same condition in relation to his own purchase has no legitimate basis to complain.
One option the government should consider is that in any case where the freeholder claims a lease is a quid pro quo, it must first be required to demonstrate that the price it paid for its own interest equals the capitalised value of the ground rent.
If that condition is not met then it would prevent any lease related to that ground rent being deemed a quid pro quo lease. If the freeholder itself did not pay full market value for its own interest, then it is not in a position to complain about leaseholders who may have done the same.
What rate will be applied to capitalise the ground rent?
The consultation says that the starting point of the test will be paragraphs 26(9) and 26(10) of the Schedule 4 to the Freehold and Leasehold Reform Act 2024.
That says that the cap of 0.1% on ground rent to be taken into account in calculating the price payable for a lease extension or freehold purchase does not apply if the premium was lower and the ground rent higher than both would otherwise have been. It is up to the freeholder to prove that this exemption applies.
So the question of whether a ground rent bears a fair relationship to the premium paid will be determined by applying the capitalisation rate it prescribes under the Leasehold and Freehold Reform Act 2024. This has not yet been set.
The government says it needs to amend the Act to deal with drafting errors before it will prescribe the rates.
In March, when speaking to the Housing, Communities and Local Government Select Committee, Matthew Pennycook said that the rate would be consulted upon and announced so that it came into force at the same time as the £250 ground rent cap.
We are therefore left uncertain as to whether creating an exemption may lead to the other problems.
Let us take an example. Assume the government prescribes a capitalisation rate of 6%.
Assume also a ground rent of £250 per year payable twice-yearly and doubling every 25 years over a 125 year lease.
Assume the premium paid for the lease was £100,000.
At a capitalisation rate of 6%, the value of the ground rent is roughly £5,800. The consultation suggests that if the freeholder claims the lease is a quid pro quo lease, we compare the £5,800 value to the £100,000 premium. So the question is whether the premium should have been £105,800 or not.
Unfortunately this is only the beginning. If the lease in question was granted, say, 25 years ago, a 6% capitalisation rate may not be appropriate to determine whether the premium was reduced by “the right amount” to reflect the ground rent.
Whatever the capitalisation rate chosen by the government, two practical difficulties then arise.
An exemption may be opening the door to many (if not all) of the current problems with lease extensions and freehold purchases being re-introduced by the back door.
Knowing whether a £100,000 premium was a fair premium considering the ground rent in, say, 1996 means knowing about the market for flats in that particular area in 1996. This opens up the need for expert valuation evidence on both issues.
Another practical issue is potentially the most serious. Virtually all of the cases considered by the higher courts, which produce binding case law precedents applied by the First-tier Tribunal, are arguments over extremely valuable Prime Central London property.
Think arguments over whether a premium for a lease extension should be £1 million or £1.5 million, or more.
In those cases both the freeholder and the leaseholder have the need and the means to litigate through to the Upper Tribunal and the Court of Appeal, which means pursuing both a claim in the First-tier Tribunal and two appeals.
Decisions on disputes of this nature produce a distorted view of what should then apply to all 5 million-odd leasehold flats. Prime Central London is not a reliable guide to what the majority of residential leaseholders experience.
The government correctly recognises that creating an exemption even where the burden is on the freeholder to prove it applies creates risks.
How freeholders might play the quid pro quo exemption
The issue is that the government proposes no clear solution. The consultation paper talks about litigation in the First-tier Tribunal, or binding determination by a specialised body, but both of these are essentially adversarial processes.
As the government recognises, unscrupulous freeholders may simply assert that leases are quid pro quo.
The most likely way they will do this is by continuing to issue ground rent demands above £250 even when the cap kicks in. If no-one objects, or they succeed in ignoring or batting away questions, then they will keep receiving the full ground rent.
There are clear examples of this type of behaviour.
In 2022 a dispute between Philippe Stampfer and Avon Ground Rents reached the Court of Appeal.
Avon had taken to charging leaseholders an administration fee of £36 for the privilege of paying £125 ground rent every 6 months.
Avon said this was justified because it had to serve a statutory notice to collect the rent and the terms of the lease allowed it to charge its costs of collecting the rent. Issuing the notice was part of the cost of collecting the rent.
The Court of Appeal threw the case out without hearing counsel for Mr. Stampfer, who fortunately managed to find a barrister willing to represent him for free. But he was, nevertheless, dragged all the way to the Court of Appeal to get that resolved. Most leaseholders lack the time, means and – frankly – the courage to do so.
There is a real risk that unscrupulous freeholders will help themselves to a quid pro quo exemption if one is created. Leaseholders will then have the cost and hassle of sorting that out themselves.
And we should not forget that there is no effective means of oversight of freeholders.
By feline cunning, they have deflected the talk of regulation onto managing agents. But no regulation of managing agents will work unless it binds in freeholders. And regulation of managing agents will not work at all unless leaseholders have the power to hire and fire them.
The safest option is to avoid creating exemptions in the first place, however well-intentioned and however clearly drafted.
What about problems in the current system, like modern ground rents and National Trust properties?
Under the Leasehold Reform Act 1967 it is possible to extend the lease of a some houses for 50 years in exchange for a modern ground rent. This involves no up-front premium.
Instead the leaseholder pays a modern ground rent. The difficulty is that the modern ground rent typically reflects 3% -6% of the unimproved land value of the house.
This often means paying a ground rent of tens of thousands of pounds a year that can be reviewed every 25 years.
Under the Leasehold Reform (Ground Rents) Act 2022 these leases are already exempt, meaning they can still be created today. That also means the £250 ground rent cap will never apply to them regardless of whether a quid pro quo exemption is created.
The National Trust
National Trust houses are often exempt from the right to acquire the freehold, meaning the modern ground rent lease extension was the only option available.
In 2018, following pressure from the Leasehold Knowledge Partnership and the then Housing and Communities Secretary Sajid Javid, the National Trust obtained an order from the Charities Commission allowing it to convert most of its modern ground rents to RPI-linked increases instead, avoiding the issue.
The National Trust continues to be exempt from the right to acquire the freehold. It is also exempt from the ban on creating new leasehold houses in the Leasehold and Freehold Reform Act 2024.
Less clear is the position where the National Trust has granted a headlease to private head landlords. Those head landlords are apparently not subject to the 2018 changes made by the National Trust because it is not the immediate landlord.
In those cases it appears that the modern ground rents may continue because they will fall within the exemption for leases that were granted for no up-front premium.
These were also a category of leases the Law Commission recommended exempting. This is something that would merit further scrutiny. It makes no sense to treat leaseholders of houses ultimately owned by the National Trust differently because they have an intermediate landlord.
The bottom line
The quid pro quo exemption carries real risks of complicating the uncomplicated.
The government’s instinct to consider exceptional cases is understandable.
But any exemption must be judged not only by the handful of leases it is intended to capture, but by the litigation, uncertainty and opportunities for abuse it creates elsewhere.
There are no administrative or legal safeguards that can resolve these issues. The safest course remains the simplest one: introduce the £250 cap without creating a new class of disputed “quid pro quo” leases.
Liam Spender is an LKP Trustee and City solicitor
Related posts:
Make sure ground rents are dead and buried by improving the Leasehold Reform (Ground Rent) Bill
Taylor Wimpey’s snake oil ground rent review scheme makes toxic leases even worse: in my case, £25m worse!
Metropolitan housing association MTVH tells MPs: we won’t collect ground rent, we have ditched marriage value and all leases are 990 years (where possible)
The Leasehold Reform (Ground Rent) Bill: opportunities and challenges
Might consumer protection law be a silver bullet against freeholders’ escalating ground rents? (And the threat to reform?)
‘What leaseholders really think’, by a freeholder lobbying group … Why they control your money ISN’T one of the questions asked
Quid pro quo arrangements are most likely in two situations.
First, where the ground rent on the original grant exceeded 0.5% of the premium. In those circumstances, the rent would almost certainly have been discussed, and the purchaser would have reflected that liability in the price offered.
Second, in a non-statutory lease extension, where the leaseholder, advised by a solicitor and valuer, knows the statutory cost but chooses an informal deal that includes a ground rent.
In these cases, I would argue the initial ground rent agreed should stand, but future increases should be capped at the lower of the lease terms or RPI. Only the original leaseholder—not subsequent purchasers—should have the right to challenge the ground rent before the FTT.
The pernicious rents of Mr Payne would be modified so the rent would be no bigger in real terms than the initial rent that leaseholder thought they were signing upto
There are many leasehold holiday homes which were never easily mortgageable where the developer took higher ground rents for lower premiums – these subject to my comments about rising by the lower of RPI or lease terms would seem a fair and balanced approach
Many informal lease extensions are done closer to or at the same time as sale and the leaseholder wanting to pay less will accept a reduction in the premium for a ground rent which tracks inflation – again in such circumstance if the reduction is genuine it should stand
My proposal avoids any suggestion that all leases are quid pro quo. Instead, the two categories would be determined using information already held by the Land Registry, making the test straightforward, objective and free from ambiguity.
There should be no flood of claims to the FTT. Any applications should be limited to the original leaseholder and, wherever possible, determined by a paper review.
To ensure subsequent purchasers are fully informed, all exempt leases should be required to disclose the net present value (NPV) of the ground rent alongside the sale price. Purchasers would therefore know exactly what they are committing to before buying, which is why subsequent purchasers should not be entitled to challenge the ground rent.
No exceptions should even be remotely considered in my opinion. Any attempt to justify any exception(s) is simply being promoted to give certain unknown Freeloaders potential ammunition to deploy Lawfare at some future date should the Government agree to what I, and others consider to be yet another absurd arguement put forward by a particular anonymous and no doubt well funded lobby group.
My interpretation of Dr Hamiltons and other expert contributors have made it iabundantly clear to me that through no fault of those who work at the Land Registry, are expected to manage an I.T system that is effectively a technological “Antique” and needs a serious upgrade.
Thank you Liam for highlighting the danger that freeholders will almost certainly take advantage of such loopholes by making spurious assertions that then still have to be challenged in court by leaseholders. As you are aware, in my own case it took 18 months to get an FTT ruling on plainly and obviously unlawful heat network charges that were issued to residents – including some who were not even leaseholders. Leaseholder faced threats of escalating legal costs being placed on the service charge along the way, while the other side repeatedly delayed the proceedings with no consequence whatsoever. Even now I have the determination, the charges residents had no choice but to pay under duress still have not been returned. The property court system is unfortunately ripe for abuse
MHCLG seem to believe that leaseholders are sophisticated enough to value ground rents and ascertain fair value for lease enfranchisement but freeholders and their advisors are so unsophisticated they could never have been expected to discount the risk in creating onerous ground rents. Barking.
CT
During the past eight years more than three purchasers of Fleecehold flats have approached me and said “What’s this letter I received about – WHATS SERVICE CHARGE? That equates to abour 15% of all residents. That is even before we talk about money for nothing ground rent. One Leadehold Purchaser basically tried to tell me that “We” whoever “We” are would be being her Flat electricity and water bill because she had allegedly been told this by her Legal representative. I did, of course, provide the lady with clarification on those matters.
Anyone “pontificating” that the current system or set up is fit for use is grossly mistaken in my humble opinion and should re read some of the recent articles published on this site and respectfully, reconnect with the reality of todays as is.
One could argue the current set up is extremely fit for the purpose of creating billable hours for lawyers and surveyors – which creating this novel ‘quid pro quo’ process will achieve quite nicely.
Speaking of the reality of today, I note the consultation document is unable to describe what a ‘quid pro quo’ negotiation is in a real concrete sense – does the leaseholder have to have requested a ground rent and commensurate reduction in the price paid in writing? – rather than an academic theoretical one that will do doubt be pushed open as wide as possible at the Tribunal.
Surely all competent conveyancers say to all leasehold buyers “you need to consider what the value of the flat is to you with a freehold interest. You then need to take professional advice in order to ascertain how much of a discount you need to secure in order to reflect the lease terms”?
After receiving that advice every single leasehold buyer needs no further government protection – they have paid a fair price, or they have overpaid due to refusing to listen to advice, or they have a case against their surveyor for incorrect advice? Either which way no government action is required.
Note – my point is that, IMHO, the entire fault in all of this is conveyancers who fail to tell every single flat buyer that they need to take very specific valuation advice on lease terms.
The freeholders are claiming these “quid pro quo” ground rents are just repayment for an upfront property discount. Fine—let’s call their bluff.
If they want to argue this is essentially an amortized loan, then it is a consumer financial product. And in the UK, consumer credit must be fully regulated under the Financial Services and Markets Act (FSMA).
Instead of arguing with them in rigged property tribunals, the government should simply mandate that any freeholder claiming a “quid pro quo” exemption must immediately register it as an FCA-regulated credit agreement (at their own expense). Suddenly, the power dynamic flips completely:
No more forfeiture: You can’t seize someone’s home over a consumer credit dispute. Freeholders would be bound by strict FCA forbearance rules.
Statutory Right to Pay it Off: Just like a car loan, leaseholders would get a legal right to early settlement based strictly on the remaining principal—bypassing their rigged valuation models entirely.
The FCA Consumer Duty: Escalating clauses (like 10-year doubling) would be immediately outlawed as unfair terms.
Severe Penalties: Breaches could render the debt completely unenforceable (meaning leaseholders can legally stop paying) and expose freehold directors to personal fines and criminal prosecution.
If freeholders want to act like banks to protect their revenue, they need to be regulated like banks. I guarantee they’d drop the “quid pro quo” argument overnight.
This misunderstands what a quid pro quo lease extension is. The higher ground rent isn’t a loan or consumer credit—it’s one element of the overall consideration agreed for the grant of a property interest. The leaseholder received an immediate benefit, typically a lower premium, in return for accepting a different rent structure. Calling it “finance” doesn’t change its legal character, nor does it mean the Consumer Credit Act or FCA regime applies.
I do think going forward the NPV value of the rent should be disclosed on sale of an existing lease so the purchaser is fully aware of the obligation to pay the rent . Had this be done the pernicious ground rents would not have seen the light of day
We need to look at the economic reality here, not just the legal label. If the argument is that a leaseholder deferred part of the upfront purchase price in exchange for future ground rent payments, that is functionally a financing arrangement.
To put it simply: if a property’s market value is £200,000 and the developer effectively “loans” the buyer £5,000 via a ground rent contract, the buyer should only pay £195,000 upfront. Mechanically, this is no different from a mortgage. The catch is that it’s an unregulated loan paid off over 125 or 200 years with compounding interest—a product no registered bank would ever be allowed to sell.
Treating these as pure property transactions allows freeholders to act like unregulated lenders. They collect compounding returns but use draconian property laws (like forfeiture) to enforce them, completely bypassing consumer protections.
Your suggestion to disclose the Net Present Value (NPV) to future buyers actually proves this point: these are highly complex financial calculations. I am not arguing that the Financial Services and Markets Act (FSMA) currently applies in a strict legal sense. However, if freeholders insist these leases are a calculated financial trade-off for a reduced premium, then logically, they should be regulated as consumer credit agreements.
If freeholders want the benefit of an exemption from the ground rent cap by claiming they effectively lent the buyer money via a reduced premium, they must be prepared to be regulated like any other consumer lender.
M,
First class. And more logical food for thought.
You claim that ground rent is for no service and is unfair and should be scrapped
Yet when shown examples where the premium is lower because of the imposition of a ground rent you still say its unfair and should be scrapped
Its a very muddled stance
Leasehold and Freehold homes sell. for what the buyer offers and the seller accepts and no other reason. New Leasehold and Freehold homes that are like for like sell at the market rate which is nearly always for as much as possible. Leasehold property is a depreciating asset it is not owned. Ground rent is paid in return for no goods or service. Freehold homes generally go up in value over the medium to long term. Many Leasehold homes depreciate in value for obvious reasons the Freeholder (many) wish to remain as is.
Stephen,
Please publish one article of my “Alleged – muddled stance”. To which I will reply too.
How can it be right to enact a law that could allow a large corporation who have agreed to pay a high ground rent to have it capped at £250 pa causing a pensioner to loser half her income?
I know I am giving an extreme example, but property rights matter. Pay what you signed up to pay or sue your conveyancer if you were poorly advised.~
I am massively in favour of significant reforms, not least reducing or ending the insanely high marriage value payments, but simply redistributing wealth from (mainly) investors to other investors and owner occupiers with no compensation is nuts.
The initial ground rent should stand exactly as agreed. However, all future increases should be capped at the lower of RPI or the increase specified in the lease. That guarantees the rent can never become greater in real terms than the parties originally agreed.
This single change would eliminate pernicious escalating ground rents at a stroke. Leaseholders would never pay more, in real terms, than the burden they knowingly accepted when they signed their lease. It would also remove the need for any complex “quid pro quo” exemption, allowing Parliament to focus instead on the far more important issues of service charges, transparency and control over expenditure.
If a lease began with a ground rent equal to, say, 1% of a flat’s value, that would have been obvious from the outset. A buyer could then have negotiated a lower purchase price, secured a reduction in the ground rent, or walked away. Equally, if the ground rent was merely nominal, the premium would likely have been higher. That is the commercial bargain.
Those with pernicious escalating rents would receive meaningful relief. Those with ordinary indexed rents would see little or no change. The only people who would not receive a windfall are those who agreed to relatively high initial ground rents—perhaps £400 or £500 a year on expensive flats. They would remain liable for the rent they originally accepted, but it could never increase in real terms beyond that original bargain.
To provide a clear and universal end point, Parliament could also provide that all existing ground rents reduce permanently to a peppercorn 40 years after the commencement of the legislation, regardless of when the lease was originally granted.
This creates a simple, fair and easily understood transition, while giving landlords a lengthy period in which to receive the income stream they legitimately expected.
This approach would allow Labour to demonstrate that it has dealt decisively with unaffordable and escalating ground rents. In practical terms, ground rents would never increase in real value and would ultimately disappear altogether. At the same time, the legislation would respect existing contractual bargains and the property rights protected by Article 1 of Protocol 1 (A1P1) of the European Convention on Human Rights. It would reinforce the UK’s reputation as a safe and predictable place to invest while delivering meaningful consumer protection.
Unlike a simple retrospective £250 cap, this proposal is far less likely to provoke prolonged litigation by institutional investors. As a result, reform could be implemented quickly rather than being delayed for years while legal challenges work their way through the courts—potentially beyond the next General Election. If the Government wishes to deliver meaningful leasehold reform during this Parliament, a solution that is both legally robust and politically deliverable is more likely to succeed than one that becomes tied up in litigation.
Legislation should correct unfair escalation, not rewrite the commercial bargain that was freely entered into at the outset.
If we were being impartial with the system you propose Stephen then the LL would have to show they offered a premium with the option of no GR. The “institutional” investors would have to show reason why they should be entitled to a peppercorn more than they originally paid -adjusted by RPI (that in many cases is 12-16x the original GR plus RPI) -any additional dodgy incomes from things like insurance a cut of management fees etc
What if the development made a loss on the development and the value of the ground rent makes the deal break even – then the ground rent was directly related to the build costs of the development and not “ for no service “
No developer would have built in the past (prior to the 22 bill banning GRs) speculating that the GR would mean the difference between profit and loss. It was at best an extra punt which sometimes paid the directors bonus. There also seems little evidence the 22 Act produced a change in the premium. If we are being honest the GR deal was sometimes more of a “quid pro quo” deal to have someone hide snagging issues.
Where ground rents are modest and subject only to reasonable increases, such as RPI-linked reviews, they do not represent payment for an ongoing service and are, in effect, a profit stream for the freeholder. However, they remain an agreed contractual term and, on that basis alone, should ordinarily be respected.
The position is no different in principle from the purchase of a car, where part of the purchase price represents pure profit rather than payment for a specific service. The fact that part of the consideration is paid over time rather than upfront is not, of itself, objectionable. What is objectionable is where lease terms contain escalation clauses that cause the ground rent to increase materially beyond expected inflation, such as rents that double every 10 or 15 years.
The proposed statutory cap is therefore a control on profit. It takes no account of whether a development proved commercially successful or unsuccessful and, unlike the cap introduced under the Leasehold and Freehold Reform Act 2024 for valuation purposes, it is not designed to facilitate enfranchisement or reduce lease extension premiums. Instead, it delivers relatively modest savings for a comparatively small number of leaseholders.
A more proportionate approach would be to preserve the contractual ground rent agreed when the lease was granted, while limiting future increases to movements in the Retail Prices Index (RPI) at each review. This would achieve the Government’s stated objective of eliminating unaffordable and pernicious ground rents without retrospectively rewriting freely agreed contractual bargains. Introducing a sunset period of at least 40 years would then ensure that ground rents gradually disappear over time in a manner that is fair and respectful to those who legitimately acquired those income streams.
The suggestion that leaseholders were so overawed by developers that they were incapable of negotiating ground rent terms is also difficult to reconcile with the wider transaction. The same argument could equally be made about the purchase price itself, yet there is little evidence that buyers generally negotiated or challenged the premiums sought by developers.
Where ground rents are substantial, particularly in non-statutory lease extension transactions, they often serve a different purpose. They become a financing mechanism that allows a lower upfront premium while providing deferred consideration through the ground rent. In such cases, the level of the rent is typically the subject of detailed negotiation between informed parties. Any retrospective reduction therefore represents a direct interference with established property rights. Unless those rents contain genuinely pernicious escalation provisions, they too should be respected.
Notwithstanding this very useful and excellent article by Liam Spender, the Government’s Consultation is very difficult to follow, fill in and it seems to have many leading questions. Liam mentions “the pseudo-legitimacy of legal Latin”, referring to the term “quid pro quo”. I would rather say: “pseudo-legitimacy of pseudo-legal Latin”, as the expression “quid pro quo” does not originate from Roman Law, which instead uses the term “do ut des” (“I give so that you give”), which is shorter, but more complex, as “ut” introduces a subordinate sentence, represented by “des”, a verb in the subjunctive tense. Curiously, there is indeed a genuine Latin expression very similar to “quid pro quo”, but it has a very different meaning: “qui pro quo”, which means “something instead of something else” and it is used to describe a misunderstanding and some sort of confusion. “Qui pro quo” seems therefore to more aptly describe this Government’s Consultation and the Freeholders’ assertions on these particular leases!