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Dealing With Escalating Ground Rents

Dealing With Escalating Ground Rents

Expert view

One of the most common ways to buy property in recent years has been leasehold. You can read more about the difference between leasehold and freehold property in our article here.

Leasehold properties are usually for flats and apartments. You buy an individual property but not the whole building. Leasehold can also be used for houses, especially new build developments. With both leasehold flats and houses, instead of buying the property outright, the buyer buys a long lease. This gives them a right over the property for the length of the lease.

125-year leases are common, as are 99-year leases in some areas, and some leases go up to 999 years. When you buy a leasehold property the lease will usually last for the rest of your life.  In many respects it seems as though you own the property completely, especially if the property is a house.

But you don’t actually own the property and as it’s a leasehold property you will probably still have to pay rent to the freeholder as they actually own the land.

Traditionally the ground rent is a small amount and frequently not collected at all on a long lease. You may have heard of a ‘peppercorn’ rent where the rent is of no value and never collected.

More recently some property owners see ground rents as an opportunity for rich investment and charge a ground rent of a couple of hundred pounds payable each year by the leaseholder. This is an annoyance for most people, but common in new leases and most people will not be worried by it.

However there is a new, more disturbing trend that the media reported on recently. Not only are ground rents becoming more expensive but terms are being included which allow the ground rent to increase over time.

In such an example a clause is present in the lease requiring initial ground rent at say £250 per year, however the clause provides that this would double every ten years. This is known as an exponential increase and whilst the ground rent starts off looking reasonable it rapidly becomes very expensive and by the 50th year of the lease, ground rent would be £8,000 per year. Taking this on to a 125-year lease, the ground rent, if not capped, would be over £1 million per year.

The media focussed largely on houses and as a result of the press coverage, the government is holding a consultation on the issue. Their plan is to stop new houses from being sold leasehold, so that new buyers won’t face this issue again. But this consultation won’t help the thousands of people affected by these clauses, who’ve already bought properties. The consultation also doesn’t address people who have bought flats on the same basis and found themselves stuck with escalating ground rents.

There are multiple issues attached with escalating ground rents. The first is the obvious one – not being able to afford the ground rent, but the second one, is less obvious but just as problematic. There will be a real problem selling a property, whether house or flat, if there are escalating ground rents. 

Even if a buyer was interested it’s unlikely that they could get a mortgage for a property with one of these clauses.

This does seem to be all doom and gloom but is there anything you can do about it?

When there are problems with a lease the usual way to address them is through a deed of variation. A deed of variation changes the terms of the lease to something more acceptable to both parties.

When some homeowners with these clauses in their lease approach the freeholder they were told that the cost of getting such a variation would be tens of thousands of pounds. This is because the freeholder didn’t want to surrender their investment.

Ultimately, if you were caught out with such a clause in your lease, you’ll usually have no choice but to either continue struggling to pay unaffordable rent, pay the freeholder a premium to remove the clause or sell the lease back to the freeholder at a huge loss.

This is, rightly, a major scandal.

There is a question about whether the conveyancer noticed these clauses in the lease when the property was purchased. If they did, you would have thought they would have informed you about the implications before you’d gone ahead with the purchase.

If your conveyancer did not tell you about this clause, you may have a claim against them for negligence.

Negligence has a number of elements that you need to prove to make a claim. In most of these escalating ground rent cases, negligence should be easy to demonstrate.

Your conveyancer should have given you a report on the title when they advised you about the purchase. Check the report to see if they mentioned the clause allowing the ground rent to escalate. If your conveyancer failed to address this issue before you exchanged contracts you will have a claim in negligence against them.

It is possible that a freeholder will be open to reach a deal with a leaseholder seeking to vary their lease it is however a near certainty that the freeholder will expect a cash premium to do so.

We strongly recommend that you contact us as soon as you become aware that you might have a claim regarding the ground rent at your property. There is not an indefinite period available for a claimant to bring such a claim and if you delay you may lose the opportunity to bring a viable claim forever.  Even if you’ve already sold the property and found that you made a loss, you might be in a position to get that money back from your negligent conveyancer.   

Escalating ground rents are a massive problem. If you are stuck with one of these leases, call us now on 0117 9264121 to see how our Professional Negligence Team can help or make a Free Online Enquiry today.