If you’re a leaseholder, ground rent is a payment made to your freeholder, often once or twice a year.
Historically, ground rents were set at a low level of around £5 or £10 and tended to be fixed for the duration of the term or would increase at lengthy intervals of 25 to 33 years.
Under modern leases, things have shifted dramatically, and ground rents can now represent a significant and valuable financial return for the long-term owner of the freehold.
In short, a buyer of a leasehold property needs to be increasingly careful to review the amount of the ground rent, and when and how it will change.
NOT THE SAME AS THE SERVICE CHARGE
Ground rent is a specified sum of money set out within the lease covenants, payable by the leaseholder to the freeholder.
It is completely separate from service charge payments, which are directly linked to maintenance and repair costs.
By contrast, the ground rent payment is simply income for the freeholder that must be paid, to avoid the risk of forfeiture of the lease.
SPOTTING AN ONEROUS GROUND RENT
Whilst there is no legal definition of an onerous ground rent, the following types of clauses can in some circumstances be considered to meet the criteria:
- The ground rent doubles every 10 years
- The rent rises in line with the Retail Prices Index (RPI) every 5 years
- A stepped increase at fixed intervals that takes the amount over 0.1% of the flat value
At first glance, these clauses can seem harmless. But over time, they can make a flat unmortgageable.
SALES AND MORTGAGE PROVIDERS
Mortgage lenders have grown wary of onerous ground rent terms, more so than before. In some cases, they may require a seller to secure a deed of variation to amend the ground rent, as a condition of lending. Otherwise the only option is to sell to a cash buyer.
Ground rents have become a significant issue in recent years, causing sales to fall through in the worst cases of onerous ground rents that increase too aggressively.
THE 0.1% RULE
A number of lenders now apply something called the 0.1% rule: they want to see annual ground rent no higher than 0.1% of the property’s market value.
If your flat is worth £250,000, your annual ground rent shouldn’t exceed £250.
A significant number of leases breach this rule, especially if they start low but double every 10 or 15 years. Some ground rents can rise from £250 to over £1,000 per year within decades.
LEGAL RIGHT TO REMOVE GROUND RENT
If your lease qualifies for a statutory lease extension, you have the legal right to replace your ground rent with a peppercorn, even if the lease length itself is not an issue.
This also has a distinct advantage over leases that have been extended voluntarily which are likely to have been required by the freeholder to retain an ongoing ground rent.
In a building with multiple flats for sale, it’s easy to see that the nil ground rent lease is going to be the safest and most attractive option to buyers with a heightened sensitivity to ground rents, which supports the case for taking the statutory lease extension route as a means of resolving the issue.
SOMETHING TO BEAR IN MIND
Ground rent might seem like a minor detail, far removed from the excitement of viewing a property, but it can have a major impact on the ability to sell or refinance the property.
If however the lease already includes a doubling ground rent clause or even an RPI linked ground rent that rises too quickly, consider dealing with this long before the urgency of a sale or time limited mortgage offer, as the process can take some time, and it will give the freeholder the upper hand in negotiations if they are aware of the leaseholders need to reach agreement quickly.
