Ground Rent in Leases

If you buy a freehold property you become the absolute owner of that property and have the freedom to deal with it as you wish and generally no further payments are required, such as service charges or ground rents.  However, if you buy a Leasehold property it is owned outright by the freeholder who has leased the property to a person, known as a leaseholder, usually for a period of 99 years or longer.  The rights and responsibilities of the freeholder and leaseholder are set out in a Lease, such as the payment of ground rent by the leaseholder and the Freeholder’s covenant to afford quiet enjoyment to the leaseholder.

In the recent past mortgage lenders have considerably tightened their requirements on leases and have picked up on three issues:

  • Assured Shorthold Tenancies (ASTs) If you are buying a leasehold property with a ground rent over £250 (over £1,000 in London), then the lease falls within the Housing Act 1988 and will generally be an AST.  The Lease can become an AST at any time during the Lease, say if the rent increases during the term.  The main issue with this is lease termination.  Most leases give the landlord a right to “forfeit” if rent goes unpaid for 21 days but the courts normally have power to grant relief, cancelling the forfeiture so long as the arrears are paid off.  The problem is that the power to grant relief does not apply to ASTs if rent is more than three months overdue.  The court has no choice in such cases: it must terminate the lease and give possession back to the freeholder.
  • Doubling/uncertain ground rents There may be a clause in the lease which states that the ground rent payable by the tenant will double on fixed dates during the term of the lease, such as every 10 years. While an initial ground rent may seem reasonable, doubling ground rent clauses mean the rent can reach extremely high levels by the end of the lease term.  Many mortgage providers view this is an onerous clause and may refuse to lend as a result.  It may also be difficult to sell a property with this clause in the lease since prospective purchasers might be put off by the potential difficulty of obtaining a mortgage or selling the property in the future.
  • Rent reviews based on block value A clause in the lease may provide for the rent to be increased in proportion to the increase in value of the flat, building or development in which the property is located. These are generally unacceptable to mortgage lenders as of late 2019 and many lenders refuse to lend on properties with rent reviews such as these.

One way to resolve any of these ground rent issues is to extend your lease under the Statutory procedure. To qualify for a statutory extension, you must have been registered as owner for at least 2 years.  This process will add an additional 90 to your Lease and ground rent will be reduced to a ‘peppercorn’ (effectively nothing!).  A premium is payable as well as the fees of the landlord and valuer but this would resolve any issues that you would have around the amount of rent payable.

If you have any questions regarding ground rent or would like any further details please contact myself or any other member of the Residential team on: 01256 320555 or email: mail@clarkeandson.co.uk.

Simon Pook Head of Residential Property

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