Niki Adkins, Associate in our Leasehold Property Team, looks at ground rent; giving an overview of what it is, what it does and why increases are such an issue for leaseholders.
What is ground rent?
Ground rents are regular payments that a flat owner (leaseholder) is required to pay to their freeholder for living in the property (a rent, essentially). Such a ground rent is detailed in the flat’s lease.
Ground rent can be paid annually or in instalments (usually half-yearly), and failure to pay can result in the freeholder seeking to obtain possession of the flat.
What does ground rent pay for?
Whatever the freeholder chooses! The ground rent is the freeholder’s annual ‘profit’ for owning the freehold of the building.
A ‘ground rent’ shouldn’t be confused with a ‘service charge’ which is what flat owners pay to the freeholder by way of reimbursement of the costs associated with the building, like buildings insurance and maintenance.
Can my freeholder increase ground rent?
If your lease expressly includes a provision for your ground rent to increase; yes. However, if your ground rent is fixed at a certain level, your freeholder cannot increase your ground rent without your agreement.
How often does ground rent increase?
The timing of any increases in your ground rent will be expressly stated in your lease.
What is doubling ground rent?
Some leases provide for a ground rent to start at a specified sum (e.g. £100.00) and for it to double at specific intervals in the lease.
For example; to £200.00 at year 20 - to £400.00 at year 40 - to £800.00 at year 60 on so on.
What is the maximum ground rent that can be charged?
At present, there is no legal limit on what ground rent can be charged under a flat lease. However, mortgage lender preference makes some ground rents less attractive, as you will see below.
Why are high and increasing ground rents an issue?
Ground rents over £250 outside of London (or £1,000 in London) – or that will end up over £250 (or £1,000 in London) in the future are a concern for mortgage lenders as, in certain circumstances, a freeholder can take possession of the flat relatively easily where the ground rent isn’t paid. This means that lending against flats with these types of ground rents could be a risk for mortgage lenders.
As a result, ground rents already over the above limits, or that start at a lower figure and increase throughout the lease’s life, are an issue.
Lenders can refuse to lend, which is where the problem lies. Even for a flat owner (or prospective buyer) who doesn’t have (or need) a mortgage, this is still an issue to consider for when they come to sell the flat in the future as most future buyers are likely to need a mortgage.
What can I do to prevent my ground rent increasing?
As a leaseholder, there are a couple of options to prevent ground rent increases; and even reduce the ground rent to zero. See below:
Reducing ground rent with a Deed of Variation
You can negotiate with your freeholder to reduce ground rent; if they are open to it. However, if your freeholder agrees to reduce your ground rent, they will likely require you to compensate them (by way of a ‘price’) for the lack of payment they would have otherwise received in the future.
A change in lease’s ground rent can be achieved through a Deed of Variation, which formally records the variation. This requires the approval of both leaseholder and freeholder. You can read more about a Deed of Variation for ground rent in the dedicated article, read here.
Reducing ground rents to zero with a statutory lease extension
Alternatively, a leaseholder can initiate a statutory lease extension which would force the freeholder to reduce the ground rent to a peppercorn (nil). The leaseholder would also acquire an additional 90 years on top of the existing lease term so that the lease is attractive both in terms of the ground rent and the number of years left.
A lease extension becomes more expensive to buy the shorter the lease becomes; therefore, today is always cheaper than tomorrow.
I discuss dealing with ground rent increases further in a dedicated article, so make sure to read it first if you are considering your options. Click here to read.
Changes to ground rents and leases
The Leasehold Reforms announced by the Government in January 2021 propose to make changes to residential leasehold properties.
These changes sound great, however enforceable legislation is not envisaged until at least 2024. This is too long to wait for leaseholders that are stuck with a short lease or a high ground rent. The majority of these leaseholders will likely want to sell or re-mortgage before 2024/2025, in which case, they can’t afford to wait that long.
If you would like to know more about the leasehold reforms, I have written a full article about them; which you can read here.
Leasehold specialist solicitors
Our specialist Leasehold Property Team is one of the largest in the region and are happy to discuss any ground rent or leasehold property related queries that this article may have raised. We have vast experience in dealing with the lease extension process from start to finish.
Please call 01202 499255 and Niki or a member of the team will be happy to chat about your situation and your specific requirements.
We offer all new clients a free initial chat with one of our bright, knowledgeable lawyers.
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