What is ground rent and when is it paid?
Ground rent the sum payable to the freeholder or landlord under the terms of a residential lease. Crucially, this sum is not linked to services provided such as repairs, insurance, or management, it is simply a sum paid to the landowner that is set out in the contract (or lease) between the parties.
It is usually paid annually or half-yearly, and can be a low and inoffensive amount, such as £10 a year and fixed for the duration of the term. Historically, ground rents were a token sum of this nature, and it is only in the past decade that modern leases have started to reserve a high amount and change how these sums increase, whereas ground rents at the lower historic levels are unlikely to cause an issue.
What is considered onerous?
There is not legal definition of what constitutes an ‘onerous ground rent’ and this is largely determined by the market for leasehold properties. However, a rule of thumb is that ground rent is considered to be onerous if:
- The annual payment is too high, for example over £300 per year.
- It rises too aggressively, for instance if it doubles or is calculated as a percentage of the sale price of the property each time the property changes hands.
- It rises too frequently, such as every five years.
A combination of these factors can cause an initial low ground rent amount to rise quickly and suddenly move to the forefront of the leaseholders’ awareness. For example, it used to be the case that a ground rent linked to the Retail Prices Index was considered a safe and stable commitment, against a backdrop of annual inflation of 2-3% this may have been the case, but taking into account the double digit figures of inflation seen in recent years, it is possible to see that at the date of review, these ground rents are accelerating to uncomfortable levels.
For example, it is common to see ground rents at around £250 per year, set to double or increase with RPI in the next five years. That is onerous because in many cases it will start to exceed 0.1% of the value of the flat, and mortgage companies may not lend against that leasehold title due to risks to the bank’s security. This simply means that the flat may need to be sold to a cash buyer who is not dependent on raising finance and is not therefore subject to lending criteria.
Cost of living considerations
High inflation has been in the news for the past few years, and it is well known that many are struggling to keep up with rising bills. It is therefore now the case more than ever that a high ground rent is going to be a major consideration for purchasers of a flat, which adds to the sensitivity of doubling or RPI linked ground rents more than has been the case in the past.
Property investors balancing act
Equally, a property investor will need to carefully consider the impact a rising ground rent will have on:
- Their return on investment; and
- The ability to refinance a portfolio later.
Simply put, ground rents are now at the forefront of many when purchasing a leasehold property due to the modern practice of higher sums that increase faster than was previously the case with the token sums we tended to see for older leases.
Options for dealing with problematic ground rents
There are broadly two routes to resolve the issue, and the best option is going to vary depending on the specific circumstances of each case:
- Statutory lease extension – this is the legal right to extend the lease of a flat along with removing the ground rent/replacing it with a peppercorn rent.
- Deed of variation of the ground rent – often pushed by the landlord as a quicker option, but usually uncertain and fraught with risks of delays or unreasonable additional clauses being put forward. This is an alternative option but must be considered very carefully.
Leaseholders using their legal right to replace the ground rent with a ‘peppercorn’ by serving a section 42 notice to extend the lease have certainty of timings (the landlord must reply within two months), and this means the landlord cannot say no to the removal of the ground rent.
In addition, should things become difficult, the leaseholder’s solicitor can take the case to the First-tier Tribunal, which simply is not an option when trying to do a voluntary deed of variation deal.
The other way to look at this is that you never see a freeholder suggesting the formal route!
Houses and flats affected
It is not just flats that are affected. It is becoming increasingly common to hear of leasehold houses in cities outside of London such as Manchester with ground rents exceeding £400. This may not have registered at the time of purchasing the property, but owners of leasehold houses are now finding that buyers will walk away once the conveyancing searches reveal the issue with the escalating ground rent.
It is a surprise to many, especially first-time buyers, that a house would be sold on a leasehold basis, particularly when the lease make all the repair and insurance obligations the responsibility of the leaseholder. On the face of it, there does not seem to be a clear legal reason to have created the leasehold house. However, it is worth noting that this issue can be fixed in many cases, and houses like flats, can benefit from a statutory right to buy the freehold if the house qualifies under the Leasehold Reform Act 1967.