Ground rent and increases of it for leasehold property

Last updated: June 2023 | 4 min read

Introduction to ground rent

What is ground rent?

Ground rent represents a leaseholder's financial obligation to their landlord (the owner of the freehold on which the leaseholder's property stands).

Rooted in the leasehold agreement, the leaseholder is required to pay ground rent as a recognition of the landlord's interest in the same property.

What does ground rent pay for?

Rather than covering specific costs or services, ground rent serves as a symbolic reminder of the landlord’s superior interest in the property.

It's not allocated to maintaining common areas or providing services - tasks typically funded by service charges in many leasehold homes.

Rather, it is a payment to the landlord in return for the landlord giving the leaseholder rights under the lease.

How to identify ground rent payable from leasehold terms

In a leasehold property, the ground rent payable can be found in the lease itself. Specified under the lease terms, it's usually stated as an annual amount, but the frequency of payments can vary. Carefully reviewing the lease can prevent unpleasant surprises related to ground rent increasing over the existing lease term.

The current situation with ground rent

How often does ground rent increase?

The frequency of ground rent increases is tied to the lease agreement.

While some leases include a ground rent clause that allows for periodic revisions, typically every 25 years, others might incorporate a 'doubling clause'. This can lead to ground rents escalating rapidly, adding financial burden on the leaseholder.

Ground rent doubling clauses: an explanation

Ground rent doubling clauses cause significant concern for leaseholders. These clauses, sometimes embedded in leasehold properties, mandate that ground rent can double over a specific period, such as every 10 or 15 years.

Consequently, what started as a manageable ground rent can transform into a daunting expense, threatening a leaseholder's financial stability and even the property's resale value.

Maximum ground rent charges: UK law insights

In the UK, there is no statutory maximum ground rent charge. However, if a ground rent clause could potentially make a leasehold flat unsellable, it might be deemed unfair under UK consumer law.

For instance, many lenders may decline mortgage applications on properties with onerous ground rent terms. This has stirred conversations around leasehold reform and ground rent, leading to the introduction of legislation like the Leasehold Reform (Ground Rent) Act 2022.

Ground rent reforms and leasehold properties

The Leasehold Reform (Ground Rent) Act 2022 and its impact

The Leasehold Reform (Ground Rent) Act 2022 marks a significant shift in the landscape of leasehold properties. Championed as a consumer protection measure, it introduces a ground rent cap of one peppercorn for new residential leases. Effectively, this brings about a halt to ground rent increases.

The legislation aims to alleviate financial pressure on leaseholders, who could previously face doubling ground rent charges every decade or so.

Does the ground rent ban apply to all leasehold properties and leasehold extensions?

Contrary to popular assumption, the Act's new rules on ground rent do not extend to all leasehold homes. For existing leases, the ground rent clause remains unaffected, allowing ground rents to continue increasing according to the terms stipulated.

However, the reform does impact statutory lease extensions. In these cases, any ground rent payable becomes a nominal sum of one peppercorn.

Understanding the removal of ground rent doubling mechanisms

Under the Act, infamous original doubling clauses are effectively eliminated for new leases. These clauses could previously see ground rent double every 10-25 years.

While the Act does not apply retroactively to existing lease terms, any new or extended leases cannot include such mechanisms. This significantly reduces future leaseholders' financial burdens and removes one of the main concerns around ground rent.

Future implications for leaseholders, freeholders, and mortgage lenders

The ban on rising ground rents in new leases raises some vital questions for all parties involved. For leaseholders, the changes represent a welcome break from the uncertainty of potential ground rent hikes.

On the other hand, freeholders who have relied on the income generated by ground rents may need to reassess their business models. Meanwhile, mortgage lenders, many of whom had been wary of leasehold properties with high or rapidly rising ground rents, may find themselves more willing to lend against leasehold properties in light of these reforms.

The issue with high and increasing ground rents

Concerns for leasehold homeowners

For homeowners of leasehold properties, the spectre of ground rent increases has been a constant worry. With many leases stipulating a doubling ground rent every decade or so, homeowners could find themselves confronted with payments far exceeding those at the beginning of the lease term.

These increases can affect their ability to sell the property or even re-mortgage it, as many lenders are reluctant to lend against properties with onerous ground rent terms.

Effect on mortgage lenders and estate agents

High ground rents aren't just a concern for leasehold homeowners; they have a significant impact on mortgage lenders and estate agents. As ground rents increase, many lenders become reluctant to offer mortgages on properties with hefty ground rent charges.

Lenders fear that these charges could affect the property's value and, by extension, their security. This reluctance can lead to decreased property values, presenting a challenge for agents seeking to sell such properties.

Impact on home ownership and potential future buyers

Increasing ground rents pose a potential barrier to home ownership, particularly for first-time buyers or those on lower incomes. With the threat of rising ground rents, the affordability of a property extends beyond the purchase price.

The annual ground rent, especially if tied to a doubling clause, could turn an affordable property into a financial burden. Future buyers must thoroughly understand the implications of the ground rent clause before purchasing a leasehold home to prevent unpleasant surprises down the line.

What you can do about your increasing ground rent

Even the most alarming ground rent increases are not without remedies. As a leasehold homeowner, you have a few avenues to explore that could potentially alter your financial course.

How to negotiate a lease extension and impact on ground rent

Securing a lease extension can be a viable option to ensure the longevity of your rights as a leaseholder. In such a process, the ground rent may be modified, frequently resulting in zero ground rent.

A statutory lease extension adds 90 years to the term of the lease and reduces the ground rent to a peppercorn, meaning you'll pay nothing.

Role of conveyancing solicitors in lease extensions

Whilst dealing with lease extensions, conveyancing solicitors emerge as indispensable allies. They possess the technical acumen to facilitate a smooth and secure transaction, potentially saving you a significant amount of time and money.

While you can take on this task yourself, employing professional assistance reduces the likelihood of expensive errors. Several solicitors also provide online calculators on their websites, enabling you to estimate the cost of a lease extension with a few clicks.

Pursuing a professional negligence claim against unfair terms

In certain circumstances, if your lease contains an onerous ground rent clause, you may have a professional negligence claim against your conveyancing solicitor. These professionals have a duty to advise about such clauses, and if they failed to do so, you may be able to recoup some of your losses.

Amending the terms of your lease to handle onerous ground rent clauses

Amending the terms of your lease is another potential solution, although this path may be strewn with legal complexities. This could involve changing an unfair term, such as a ground rent clause that leads to astronomical payments. However, this route typically requires the agreement of your landlord and may be more challenging to achieve.

Looking forward: zero ground rent and leasehold reform

Beyond the immediate, the leasehold landscape in the UK is undergoing monumental shifts. The future promises significant reforms, with a strong emphasis on eliminating ground rent.

Government plans for zero ground rent

The government has made clear its stance on the leasehold ground rent. The Leasehold Reform (Ground Rent) Act 2022 has already signalled the government's intention to bring ground rent to zero for new long residential leases.

With this Act, the government aims to prevent leaseholders from being charged ground rent, thereby offering greater protection to leasehold homeowners.

The Competition and Markets Authority: acting against onerous ground rent

The Competition and Markets Authority (CMA) plays an instrumental role in safeguarding the rights of leasehold homeowners. The CMA has been stepping up its action against onerous ground rent clauses, investigating leasehold practices, and pushing for changes to protect homeowners.

For further information, refer to the CMA's advice on leasehold ownership.

Future prospects for leasehold homeowners and ground rent

Despite the challenges today, the outlook for leasehold homeowners is not bleak. The prospect of zero ground rent is becoming more realistic, and continuous reform to leasehold law is likely to improve the situation further. Though change may be gradual, the future seems brighter for leasehold homeowners and their struggles with ground rent.

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