Ground rent can cause serious issues for you as a leaseholder.
But what exactly is ground rent? How can it impact you? And what can you do to mitigate issues?
In this article Leasehold Property Expert Niki Adkins covers the basics of ground rent…
What is ground rent?
Ground rent is a fixed sum of money payable to a landlord or freeholder under the provisions of a flat’s lease. It is a condition of most leasehold properties and must be paid for the lease to remain valid.
What are the typical ground rent clauses?
There are three main types of ground rents you may come across:
Historic ground rents
Traditionally, leases contained fairly minimal ground rents. Say, from £10 a year to £150 a year. They were often reasonably increased at specific points during the term of the lease., such as:
- £50 at the start of the lease,
- £100 mid way through,
- £150 towards the end of the lease term.
Modern ground rents before 2022
In the 15 or so years leading to 2022, new leases often contained much higher ground rents, starting from around £250 a year.
Some of these ground rents also doubled at fairly quick intervals during the lease, resulting in ground rents of £1,000s a year in a fairly quick period.
Ground rent on new leases
Since June 2022, all new residential long leases must only contain a ‘peppercorn’ ground rent, which means a nil or zero ground rent.
What does ground rent pay for?
Ground rent does not cover any services or maintenance. It is simply an income stream for the landlord or freeholder, included as a legal requirement in leasehold property agreements.
Can my freeholder increase ground rent?
A freeholder can only if your lease already contains an ‘increasing’ or reviewable ground rent clause. If your lease states a fixed rent, ground rent cannot be changed.
Even when extending your lease by agreement, the freeholder cannot increase the ground rent above what is stated in the original lease.
What is doubling ground rent?
Doubling ground rent is where the lease sets out increases that double at specific points. For example:
£250 -> £500 -> £1,000 -> £2,000, and so on.
This can quickly make a property expensive to own and difficult to sell or mortgage.
What is the maximum ground rent that can be charged?
The maximum ground rent your landlord or freeholder can charge is dependent on what the lease agreement allows.
In older leases, this may be a fixed or escalating sum, whereas in new leases (since June 2022), ground rent must legally be zero.
Why are high and increasing ground rents an issue?
Legal risks for leaseholders
Under the Housing Act 1988, if ground rent exceeds £250 a year, the lease can technically be classed as an Assured Shorthold Tenancy (AST).
This means the freeholder could, in theory use AST possession rules to seek repossession of the flat, a risk never intended when the law was created.
Impact on mortgage lenders and buyers
Due to this anomaly, mortgage lenders are often reluctant to lend on properties with high or doubling ground rents, which can make leasehold flats harder to sell.
What can I do to prevent my ground rent increasing?
There are currently two possible options, and the option taken depends on how cooperative your landlord or freeholder is. The potential options are:
- Ground rent Deed of Variation – an agreement with your freeholder to reduce rent.
- Statutory lease extension – a legal right to forcibly extend your lease and reduce ground rent to zero.
How to reduce ground rent with a Deed of Variation?
A ground rent Deed of Variation requires the agreement of your landlord or freeholder, meaning the terms are usually dictated by them. The best outcome in this situation is to amend the lease so that the ground rent is reduced to a peppercorn (i.e. nil/zero).
In most cases the freeholder will ask for a premium payment as compensation for the loss of future ground rent income. They will also typically require you to cover their legal and valuation fees as part of the process.
You can find out more about deed of variations in our previous article here.
What do I do if my freeholder refuses a Deed of Variation ?
The current back-up plan is to undertake a ‘statutory lease extension’.
The lease’s term would be extended by an additional 90 years (which may or not be needed) but it would also reduce the ground rent to zero.
It may be a sledgehammer to crack a nut, but if the landlord/freeholder doesn’t agree to a Deed of Variation, it is currently the only back-up option.
Again, your landlord or freeholder would need to be compensated and would require you to cover their professional costs.
To find out which option will be applicable to your scenario, we recommend that you contact your landlord or freeholder as a first step. We provide some guidance on doing this in our article here.
What are the upcoming changes to ground rents and leases?
The proposed Renters Reform Bill is intended to bring the ground rent issue to a potential end. However, we do not yet have a specific date for when this legislation will be enacted, nor its exact detail as to how it will remedy the ground rent problem.
Further legislation is proposed to provide leaseholders with a right to force their landlord/freeholder to reduce their ground rent to a peppercorn (i.e. nil/zero) but without the additional expense of having to extend their lease at the same time where they don’t need to extend. Again, there is no published detail on this proposal or when this may be effected.
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Specialist Leasehold Solicitors
Our expert team of Leasehold Property Specialists, will be able to provide you with tailored advice in plain English to help you reach your desired goals.
To speak to a member of our Leasehold Team, about lease extensions, ground rent or deed of variations, call 01202 499255.
All new clients are offered a free initial chat, giving you a chance to discuss your need. You can book your initial chat via the get in touch form at the top of this page.
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