Not Yet a Peppercorn: The Ground Rent Cap and Where Commercial Leases Stand

A good deal has been written this year about ground rents becoming a peppercorn, and much of it has run ahead of the law. For new long residential leases the peppercorn arrived in 2022 and nothing is pending. For existing leases the position is a draft Bill rather than an Act, and what it proposes is a cap of £250 rather than a peppercorn, with the peppercorn arriving forty years later. For commercial leases the answer is different again, and more comfortable than some landlords fear.

What is already law

The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022. For a regulated lease, meaning in broad terms a long residential lease of a single dwelling granted for a premium, the landlord may require no more than a peppercorn. That has been settled for over four years. The present debate concerns leases granted before that date, of which there are a great many.

What is proposed for existing leases

The draft Commonhold and Leasehold Reform Bill was published on 27 January 2026. It would cap ground rents on most existing residential long leases at £250 a year, and convert them to a peppercorn after forty years. The distinction matters more than the headlines suggest: a leaseholder paying £600 today would fall to £250 on commencement and would reach nil only in the 2060s.

The Bill is not in force and, as matters stand, has not been introduced to Parliament. The Housing, Communities and Local Government Committee completed pre-legislative scrutiny and reported on 27 May 2026, recommending that the forty year transition be cut to twenty, which is what the previous Government had proposed, and that the cap take effect automatically two months after Royal Assent rather than being left to secondary legislation. The Committee wanted the Bill introduced in the autumn, Royal Assent by the middle of 2027 and the cap in force by late 2027. The Government's own estimate is that it would not take effect before 2028. The Prime Minister recommitted to the Bill in September, and at the beginning of October it had still not been laid.

The bargain that may be carved out

A consultation this summer addressed what the Government calls quid pro quo leases, meaning those where a higher ground rent was deliberately traded for a lower premium, either at grant or on a lease extension. The proposal is that such leases escape the cap, but only where there is clear evidence the leaseholder had a genuine choice. A high rent alone will not be enough, and a non statutory extension in which the leaseholder simply carried on paying the old rent would not qualify. Equivalence would be tested using the valuation machinery of the Leasehold and Freehold Reform Act 2024. Even an exempt lease would reach a peppercorn at forty years. How any of this binds a successor in title remains unresolved, which is a point conveyancers will feel before anyone else does. The consultation closed on 27 August 2026 and the Government's response is awaited.

The challenge that is coming

Around 3.8 million leasehold properties carry a ground rent obligation. Between 770,000 and 900,000 leaseholders pay more than £250 a year, and over £600 million was collected in 2025. The Government estimates lifetime savings to leaseholders of between £10 billion and £12.7 billion, which is the same sum viewed from the other side of the ledger, and a good deal of it sits with pension funds and insurers who bought ground rent portfolios as income assets.

The Select Committee concluded that a challenge under Article 1 of the First Protocol to the European Convention is likely, and the Minister has said he fully expects one. There is already a live precedent. The freeholders' judicial review of the Leasehold and Freehold Reform Act 2024 was dismissed on every ground by the Divisional Court on 24 October 2025, but on 1 April 2026 five groups of freeholders were granted permission to appeal. No hearing had been listed by the spring, and the realistic expectation is a hearing in late 2026 or early 2027, with judgment in the first half of 2027.

That timetable repays a moment's thought. If the Bill is introduced this session and receives Royal Assent in the middle of 2027, Parliament may have legislated the cap before the Court of Appeal has said whether the 2024 Act's interference with freeholders' rights was lawful. Reform and litigation are running on parallel tracks rather than consecutive ones, and that is the best reason of all for not treating the cap as settled.

Where commercial leases stand

The short answer is that commercial leases sit outside all of this. The reasoning is worth setting out, because the boundary is not always where people assume it to be.

A lease of shop, office or industrial premises is not a regulated lease under the 2022 Act and never was. The Act bites on long residential leases of a dwelling granted for a premium, so a commercial letting needs no exemption: it was never within scope. The same is true of the £250 cap as drafted, which is directed at existing residential long leases.

The 2022 Act does contain an express exception for business leases at section 2, and it is narrower than its name suggests. Three conditions must be satisfied. The terms of the lease must expressly permit the premises to be used for business purposes. The use of the dwelling must significantly contribute to that business. And both parties must have given written notice, at or before grant, of the intention to use the premises in that way. Business there includes a trade, profession or employment, but the Act expressly excludes a home business. A flat with a study in it is not a business lease. A flat above a shop, let together with the shop on terms that say so and with the notices given, may well be.

Mixed use buildings are where practitioners should concentrate. In a block with retail at ground floor and flats above, the long residential leases would be caught by the cap and the commercial leases would not. A freeholder's rent roll would be divided by the reform rather than extinguished by it, and anyone valuing such an investment should be separating the two streams now rather than at commencement.

Commercial ground leases, meaning the long leases of commercial buildings held as income investments, are untouched. So are rack rent commercial leases, which carry no ground rent in the first place. For those the relevant reform is a different one: the ban on upward only rent reviews introduced by the English Devolution and Community Empowerment Act 2026, which has Royal Assent but is not yet in force.

What to do on a file now

For a residential purchase, nothing has changed. A client buying a flat this month with a ground rent above £250 should not be advised to rely on the cap, which is a draft Bill with a 2028 target and an unresolved appeal behind it. The present difficulty remains the present one: a ground rent above £250 outside London can bring a long lease within the assured tenancy regime, with the mandatory ground for arrears that follows, and lenders have not softened on the point. Where a lease is short and the rent onerous, a statutory extension still delivers a peppercorn a great deal sooner than Parliament will.

For a commercial client the question is one of exposure rather than compliance. Any freeholder or investor holding residential ground rents should be taking a view on the cap now. Anyone holding a mixed use building should know which part of the income is at risk and which is not, and should expect a purchaser's solicitor to ask.

A reform still in draft

It is a curious feature of this area that the proposals attract more certainty in the telling than they possess in law. Ground rents on new residential leases have been a peppercorn for four years. Ground rents on existing residential leases are the subject of a Bill that has not yet been introduced, whose central mechanism is a cap rather than an abolition, and which will very probably be litigated. Commercial leases sit outside the scheme altogether. Advising on any of it begins with establishing which of those three categories the lease in front of you belongs to.

The law is stated as at 12 October 2026. This article is general information and not legal advice, and the position on any particular lease depends on its own terms.

About the author: Dr Aamir Nawaz, LLB (Hons), LLM, PhD, Solicitor, Barrister (np) and Notary Public.