The Hemel Hempstead-born 37-year-old succeeds fellow Briton Ian Poulter, who hosted the 2015 event at Woburn.
This year's tournament was the first since 2008 and was won by Sheffield's Matthew Fitzpatrick.
The Grove has only ever held a European Tour event once before in its history - when Tiger Woods won a World Golf Championship tournament in 2006.
"We knew the British Masters would get great crowds," said Donald.
"The British people love coming out and supporting their events and supporting the British players. It was a fun and successful week.
"Woburn was a tremendous venue and Ian did a brilliant job as the ambassador. It's my turn next and I will be looking forward to coming back and hopefully having even more success and bringing even more people to this amazing tournament."
Luke Donald will host the 2016 British Masters at The Grove in his home county of Hertfordshire.