Britain’s competition watchdog has said ground rent is “neither legally nor commercially necessary” and that government may need to step in to protect consumers from soaring costs.

The housing secretary, Michael Gove, is considering capping all existing ground rents – possibly reducing them to a nominal “peppercorn” level, in effect zero – and launched a consultation in early December.

Hundreds of thousands of leaseholders are trapped in contracts with rising ground rents, which can double periodically or increase in line with inflation, making it hard to sell or remortgage properties, and their property rights can be at risk if they fall behind on payments.

The government’s plans have met with fierce opposition from the Residential Freehold Association and the British Property Federation (BPF), which says making such changes without compensating freeholders would be open to legal challenge, and taxpayers would be on the hook.

The Competition and Markets Authority (CMA) said it “continues to consider that statutory intervention may be necessary to protect consumers associated with expensive ground rents”.

In its response to the government’s consultation, the watchdog said: “Our conclusion was that ground rent was neither legally nor commercially necessary, and we saw no persuasive evidence that consumers receive anything in return.

“We can also see that the UK government’s broader view that the housing market has to be modernised, and released from anachronistic practices, is a highly relevant consideration in its decision-making.”

There has been a lengthy battle to reform what Gove has called the “feudal” leasehold system in England and Wales, where leaseholders do not own their homes outright and pay ground rent to the freeholder. The CMA launched an investigation into unfair practices in 2019, and has helped 21,000 leaseholders seek redress from developers and freeholders. The government abolished ground rent for new leases in the summer of 2022.

The CMA said: “It is clear to us from our investigation that ground rent can cause a wide range of problems including, but not limited to, circumstances in which lease terms are likely to be unfair and unlawful under consumer protection law.”

A fifth of all properties in England are leasehold homes. Investors started buying up freehold titles in the 1990s and at the same time big developers began to sell their new homes as leaseholds, later selling the titles on to investment firms.

The CMA expressed concern about the “modern leaseholds” that emerged in the 2000s, where ground rent often doubled periodically or increased in line with inflation. It said it was “possible that the inclusion of doubling clauses in leases may in some cases have been stimulated by investors”.

The CMA said a further eight freehold investment companies had reached settlements with housebuilders to offer improved terms to leaseholders with ground rents that were doubling every 10 or 15 years, benefiting more than 500 households. All leaseholders will have their ground rents return to the original fee amount – the amount charged when the property was first sold – and they will not increase over time.

These companies include three freeholders that bought leases from the housebuilder Taylor Wimpey: Island Apartments Freehold Limited, Madison Close Freeholders Limited and Plaza 2 Surbiton Limited. The housebuilders Redrow, Crest Nicholson, Miller Homes and Vistry have also agreed settlements with the freeholders Adriatic Land 3, Abacus Land 4, RMB 102 Limited and Space in London Limited so that doubling ground rent clauses can be removed.

Abacus Land 1 has also agreed to improve terms on leases it acquired from the housebuilder Countryside.

The Adriatic and Abacus companies are owned by UK pension funds and managed by Long Harbour, an investment fund whose chief executive and part owner is William Waldorf Astor, the eldest son of the fourth Viscount Astor. His half-sister is Samantha Cameron, a businesswoman and wife of the former prime minister David Cameron.

RMB 102, previously known as Ashcorn Limited, counts James Tuttiett among its directors, whose company, E&J Estates, administers more than 40,000 residential leases.

The Leasehold Knowledge Partnership – a charity that provides support to leaseholders and is part of the National Leasehold Campaign, which campaigns for the abolition of residential leasehold in England and Wales – said: “Ground rents have always been just an additional profit scheme from the developers and those who buy ground rent income streams on a speculative basis.

“The developers and freeholders entered into a government pledge to limit ground rents in 2019. It has taken a lot of work from the CMA to force more developers and freeholders to finally meet that pledge five years later.”

Ian Fletcher, director of policy at the BPF, said: “We would agree with the CMA that any leaseholder facing significantly escalating ground rents should be protected … but that is a very small part of the market, and should not be used as an excuse by the government to extinguish the rights of the vast majority of ground rent investors, often pension savers, who are after all consumers too.”