What is ground rent? Ground rent is a legal term and refers to regular payments made by an owner of a leasehold property to the freehold owner or the superior leasehold owner (known as “the landlord”), as required under a clause in their lease.
A ground rent is created when a freehold piece of land is sold on a long lease or leases. You can read about the difference between leasehold and freehold property in this article: Leasehold and Freehold Property Explained
The majority of flats will be owned on a leasehold basis and the owner will therefore be obliged to pay ground rent however there are also many leasehold houses in existence which are similarly responsible for paying ground rent. You should be aware that ground rent is not the same as an insurance rent or service charge which relates to services carried out by the owner of the freehold or superior interest on behalf of the leaseholder owners and is usually payable in addition to the ground rent.
Ground rent is usually paid annually or bi-annually and can be fixed or escalating. All leasehold properties will be subject to ground rent however some may only be obliged to pay a small annual fee such as £50.00 to £100.00, whilst others may be obliged to pay hundreds of pounds per year.
Fixed ground rent Some leases set a fixed ground rent. The ground rent is fixed because it does not increase over the term of the lease which therefore gives the leasehold owner and their mortgage lender certainty on the amount of ground rent that will be payable in the future. At present, the majority of mortgage lenders do not have an issue with lending on properties where the ground rent is fixed although you should speak with your chosen conveyancer before spending money on submitting your mortgage application in order to check that the ground rent terms meet the general conditions of your chosen mortgage lender as each lender has different requirements.
Escalating ground rent Other leases set an escalating ground rent. Usually the ground rent will begin at a known amount such as £100.00 and at set intervals during the lease term the rent will be reviewed and increased. The form of escalation used can include a ground rent which increases by fixed amounts on every review, a ground which doubles on every review, a ground rent which increases in accordance with the percentage increase in the value of the building on every review or a ground rent which increases in accordance with a recognisable and published formula such as the retail prices index (known as “RPI”) on every review.
Escalating ground rents have recently drawn negative attention because of the difficulties that they have been causing for many leasehold owners and intending purchasers. In particular, well-known high street mortgage lenders have taken issue with lending on leasehold properties if the ground rent doubles
or increases drastically over time, even where the result is that the drastic increase does not take place until long after the mortgage term will have ended. For example, a lease with a term of 999 years might have a starting annual ground rent of £200.00 which is set to double every 10 years. In this case, the ground rent would increase to £3,200.00 per year in 40 years’ time but then to £204,800.00 per year in 100 years’ time!
Although the mortgage term will have long since ended in 100 years, the mortgage lender will likely be concerned about the impact that this increase would have on the future marketability and, consequently, the value of the property. This can be a real problem for leaseholders not only because their ground rent will double but because it can also create an issue when you want to sell your property as the clause can affect the saleability and mortgageability of the property.
There are obvious financial incentives for a freehold owner to include these clauses in new leases. Not only do they provide an ever increasing income from leaseholders during the course of the lease but these clauses and the income that they provide also make the freehold title more valuable when and if the freeholder owner chooses to sell it. As a result, freehold owners can be reluctant to agree to remove a doubling or onerous ground rent clause unless the leaseholder agrees to pay a substantial premium.
An escalating ground rent clause is affecting me. What can I do? The freehold owner cannot insist that you pay more rent than set out in the lease. Therefore, if there is no escalation clause in the lease, you do not need to be concerned. If you are unsure about the type of clause used in your lease, you should contact a qualified conveyancer who will be able to advise you. If your lease does contain an escalation clause which could have a negative impact on your leasehold property, there is scope to alter the terms of a lease so that the offending ground rent clause is removed or altered and made acceptable to mortgage lenders’ current criteria.
Developers have come under scrutiny for imposing such clauses on purchasers in the first place when selling leasehold property and some have signed a government-backed Public Pledge for leaseholders in which they have agreed to identify leases within their portfolio which contain a clause whereby ground rent doubles, to contact leaseholders to inform them and to offer to vary the clause to one linked to RPI which are currently in line with the majority of mortgage lender’ lending criteria.
They will also assist leaseholders who approach them and, as we have already seen in some cases, may even pay for the costs associated with varying the clause within their lease. One of the developers which has recently been given media attention is Taylor Wimpey, which has set aside £130m to vary leases affected by a doubling ground rent clause to increases linked to RPI and Meade King LLP have acted for leasehold owners in a number of those variations within the last 12 months.
It is hoped that the announcement of this Pledge will place public pressure on house builders and freehold owners, to make the situation better for leasehold owners until the leasehold market is reformed by the government. If a ground rent is payable then you must make sure that you continue to pay it. Failure to do so, even where ground rent has reached an unaffordable level, is a breach of your lease terms and could lead to court proceedings as well as a judgment affecting a leasehold owner’s credit score in the final resort of forfeiture of the lease. The threat of forfeiture may lead the mortgage lender to pay any ground rent arrears and to add the amount to their security which, as a result, would lead to possible increased mortgage payments for the leasehold owner.
If you have been approached to accept an offer to vary your lease or if you wish to make an approach to the freehold owner of your property to request a variation of your lease, you must obtain independent legal advice from a qualified conveyancer. Similarly, if you are the intending purchaser of a leasehold property then you should ensure that you instruct a conveyancer who is well versed on what to look out for when reviewing a ground rent escalation clause. The UK Finance in its Mortgage Lenders Handbook, requests the conveyancer to consider and, if necessary, report to them rent review clauses of potential concern.
The conveyancer acting with the skill and care expected of them, should report to the purchaser and the mortgage lender any onerous review clauses in the lease and seek a variation of the clause.
If you need help with a ground rent clause, please contact one of our qualified conveyancers on 0117 926 4121 or, alternatively, please email email@example.com and we will be more than happy to help you.