The issue of high ground rents on leasehold properties has been widely reported in the media in the past few years. We look at a recent decision forcing one developer to rectify the position and a proposed new law to scrap ground rent for new leases.
If you own a leasehold property, ground rent will be payable to your landlord/freeholder. Unlike service charges, these ground rent payments have no bearing on the quality of service and maintenance provided to the leaseholders. Historically, ground rents were fixed at a low rate or for a nominal sum of £1. However, in recent years, ground rents have been rising sharply and are becoming a growing concern for leaseholders.
The Competition and Markets Authority (CMA) found the ground rent terms imposed by housing developers like Countryside Properties and Taylor Wimpey to be unfair. The housing developers have been asked to remove the unfair terms and for the ground rent to be increased in line with retail prices index (RPI) measure of inflation. Other developers are being investigated and it is hoped that they will follow or be forced to. Whilst these decisions mainly relate to leasehold house developments, a new law is being proposed which would apply to new leases of any property, flats or houses, obliging the ground rent to be set at a “peppercorn rent” i.e. no ground rent is payable in practice.
Unfair ground rents have impeded the sale and purchase process of leasehold properties with ground rents that increase too quickly over the term of the lease, and those that exceed a certain level.
Each mortgage lender has a different requirement but most will take issue if the ground rent increases too quickly during the term of the lease (say every 5,10 or 15 years) and if it goes above £1,000 per annum in London and £250 per annum outside of London.
The reason for this is that the Housing Act 1988 states that a lease will be classed as an Assured Tenancy if the ground rent is in excess of these levels. Essentially, this means that failure to pay the ground rent could allow the landlord to take possession of the property under Ground 8 of the Act.
This issue has been a focus of property solicitors in recent years who have had to find solutions to enable leases to be acceptable to mortgage lenders. There are a number of solutions to get around the issues:
leaseholders can negotiate with their freeholder and enter into a deed of variation to vary the terms of the lease so that the ground rent payable is limited to £250 per annum or £1,000 per annum in London. However, the landlord will often require a premium in return for capping the ground rent. Alternatively they may agree to a clause providing that they will serve notice on the mortgage lender first before taking any action to repossess the property. They cannot be obliged to agree;
where leaseholders have owned the property for 2 years, they have a statutory right to extend their lease and reduce the ground rent to a zero ‘peppercorn’ ground rent. To do this, leaseholders need to pay the landlord a premium and the landlord’s legal costs of extending the lease;
lenders may be willing to lend on the leasehold property if an indemnity insurance policy is in place to cover the losses lenders may suffer.
The proposed new law, currently the Leasehold Reform (Ground Rent) Bill aims to address the issues surrounding ground rent. The Bill proposes to end ground rents for new, qualifying long residential leasehold properties in England and Wales.
However, the new law would only apply to new leases and the provisions will not be retrospective.
Our clients are mainly purchasing prestigious, long-established properties in Central London, often with high ground rents, and they will remain liable for these rents under the new proposals. It remains to be seen when, if ever, existing tenants might also have their ground rents reduced by law. This is unlikely to happen under the current proposals, unless further amendments are made to the Bill before it becomes law.
However, these developments may provide some weight to a request during the conveyancing process, or for existing flat owners, to help insist on a deed of variation to reduce the ground rent. In addition, other variations of the lease can be deemed to be a surrender of the current lease, and that would mean the ground rent would have to be reduced to a peppercorn under the new proposed law.
If you are looking to buy a leasehold property, or already own one, it is advisable to review the lease provisions on ground rent carefully. Please do contact a lawyer within our residential team who will be happy to discuss this further with you.
