The New Ground Rent Consultation: "Quid Pro Quo" Leases And The Retirement Living Sector

The draft Commonhold and Leasehold Reform Bill was published in January 2026 and has been controversial from the start. One of its key aims is to cap ground rents in existing long residential leases at £250 a year from an implementation date in late 2028, reducing in 2068 to a peppercorn. This follows from a previous consultation under the last Conservative government in 2023/24 which weighed up five different options for tackling excessive ground rents.

1 INTRODUCTION

The Leasehold Reform (Ground Rent) Act 2022 banned ground rents in most new residential long leases on 30 June 2022 and from 1 April 2023 for leases of retirement homes, so the new policy is relevant only for existing leases.

The new policy has received scant praise: on one hand, the cross-party Housing, Communities and Local Government Committee has argued in its pre-legislative report that the cap's implementation date should be brought forward to late 2027, on the basis that leaseholders have waited long enough. On the other hand, some freeholders (such as the lobby group Justice For Property Rights) oppose the measure, pointing out that there will be no compensation for the £12.7bn transfer of value from freeholders to leaseholders, and arguing that this measure retrospectively interferes with legally binding contracts and may violate property ownership laws.

In the midst of this furore, the Government has released a new consultation asking whether 'quid pro quo' leases (where the tenant agreed to pay a higher ground rent in exchange for a lower premium) should be exempt from the ground rent cap.

What's in the draft Commonhold and Leasehold Reform Bill?

• Part 2 - Commonhold: Implementation of the reforms set out in the Commonhold White Paper, in order to overcome previous shortcomings in the tenure. This aspect of the Bill is discussed in an earlier briefing.
• Part 2 – Banning new leasehold flats: From a certain date, no new leasehold flats will be allowed. There will be a notice procedure for permitted leases.
• Part 3 - Ground rent: By extending the Leasehold Reform (Ground Rent) Act 2022, the Bill will cap ground rents at £250 a year, changing to a peppercorn cap after 40 years.
• Part 4 - Enforcement of long residential leases: Forfeiture will be abolished and in its place landlords will be able to bring a “lease enforcement claim".
• Part 5 - Estate rentcharges: The Bill will remove the current remedies for enforcing rentcharges by repealing sections 121 and 122 of the Law of Property Act 1925, and will require rentcharge owners to serve notice before taking any enforcement action for unpaid sums.

2 RELEVANCE FOR THE RETIREMENT HOUSING SECTOR

This possible exemption is particularly relevant for the 'for sale' retirement living sector where potential purchasers can often choose between different combinations of mechanisms for paying the upfront premium, ongoing service charge payments, and deferred costs and fees in the form of event fees. Before 2023, ground rents were also part of this equation. This briefing will discuss the questions in the consultation, focussing on its relevance to retirement housing.

3 THE CONSULTATION

The five key questions asked in the consultation are as follows:

3.1 Defining a quid pro quo lease

The consultation asks whether the definition of a 'quid pro quo lease' in paragraph 26(9) of Schedule 4 of the Leasehold and Freehold Reform Act 2024 would work in this context. Operators or investors in the retirement housing sector might want to suggest that modifications to other payments (such as service charges and event fees) should be taken into account as well.

How is a 'quid pro quo lease' defined in paragraph 26(9) of Schedule 4 of the Leasehold and Freehold Reform Act 2024?

"The current lease was granted on the basis that—

(i) the premium was lower, and the rent was higher, than each would otherwise have been, and

(ii) the value of paying the lower premium was (at the time of the grant) broadly equivalent to, or greater than, the capitalised value of the extra rent."

3.2 Evidencing a quid pro quo lease

The paper then considers what measures could be put in place to identify the sort of leases that should rightly benefit from any such exemption. Proposals include:

• The freeholder providing evidence that the leaseholder had a real choice between different amounts of ground rent for the property under consideration;
• Both parties signing a declaration that they agreed to the arrangement before or at the time of the grant of a new lease or the extension of an existing one; and/or
• A tribunal or third-party body making a declaration that the lease meets the criteria.

The first option should be straightforward for retirement housing operators to evidence whereas options 2 and 3 rely on either co-operation from the leaseholder or on the successful conduct of a tribunal process.

3.3 Treatment of exempt quid pro quo leases

The Government's starting point is that any exempt ground rents in quid pro quo leases will be capped at a peppercorn 40 years after the implementation date of the ban, just the same as all the other leases. This is because they consider that another 40 years of receiving the agreed rental levels will compensate freeholders for any forgone premium. Retirement housing investors and operators are invited to comment on whether this assumption is correct. The sector should also consider the impact of this proposed cap on their wider investment structures where the current portfolio of ground rental income is relied upon to pay commitments up the chain, such as in sale and leaseback structures.

3.4 Successors in title

The paper asks what should happen to the amount of ground rent payable under a quid pro quo lease when it is sold by the leaseholder? The possible approaches include:

• The purchaser always continues to pay the higher level of ground rent;
• The purchaser only continues to pay the higher level of rent if the freeholder can demonstrate that the purchaser was aware of the arrangement and benefited from it in terms of a reduced premium; or
• The higher rent only remains payable while the original leaseholder owns the lease.

The first option is the most straightforward. The second option would require freeholders to take action every time a lease is assigned and freeholders would have no certainty that the rental stream would continue as negotiated. The paper recognises that the third option creates an incentive for a leaseholder to assign its lease immediately as a mechanism to pay a lower premium. It is important for freeholders (including retirement housing investors and operators) to point out that they should not be penalised for having offered flexible payment options.

3.5 When do these leases occur?

The Government is keen to understand more about the grant of 'quid pro quo' leases in practice, how they were documented and whether the arrangement of a higher rent and corresponding lower premium were explicitly agreed in writing. Retirement living investors/ operators which offered such deals should consider sharing their data so that the Government has greater visibility about the frequency and terms of these arrangements in this sector and see this as an opportunity to provide Government with more information about the economic factors affecting the decisions made by residents in their schemes.

4 CONCLUSION

Leasehold reform campaigners warn that any exemption for quid pro quo leases risks years of litigation, and could cause both uncertainty for leaseholders and opportunities for abuse by landlords. On the other hand, freeholders will want to explain to Government the extent to which offering prospective homebuyers a range of payment options reflects wider and longer-terms efforts (such as the Law Commission's 2017 report on event fees) to balance consumer safeguards with customer choice. The consultation closes on 27 August 2026 and it will be important for the real estate sector in general, and those in the retirement sector in particular, to engage.