If you own a long lease on a property in England and Wales, you will typically have to pay rent to the freeholder or landlord of the property; this is known as ground rent.
The lease will generally specify how much rent you have to pay and when it has to be paid. This is sometimes paid in one instalment or may be payable half-yearly or quarterly.
Ground rent can be fixed or escalating. If it is fixed, it means that it remains unchanged throughout the term of the lease. Escalating ground rents will increase during the lease. The lease will specify when the ground rent increases and by how much.
Most leasehold properties that have an escalating ground rent will have reviews in line with RPI, CPI or other indexes; however sometimes the ground rent review clause is not indexed, meaning it increases exponentially regardless of inflation. This is generally referred to as ‘doubling ground rent’ or ‘excessive ground rent’.
For example, if a lease is for 125 years and contains a clause that states that the ground rent is initially £200 and doubles every 10 years, the ground rent would be as follows:
Some lenders will only accept an indexed ground rent review or similar clauses instead. They want to ensure the reviews are reasonable, to avoid issues of non-payment further down the line, and to ensure future saleability.
As a result, properties with doubling ground rent are challenging to sell.
This can be for several reasons:
One solution could be to implement a deed of variation to amend the review clause to be in line with an index. The cost, calculated by the freeholder, will vary from development to development – this could be your best chance of selling the property.
Provided you have owned your flat for two years, you may have the right to extend your lease. The process of adding extra years to your lease will reduce your ground rent to a peppercorn rent (A token or nominal amount used to satisfy the requirements for the creation of a legal contract)
Another solution could be to buy your freehold. You and your fellow flat owners may have the collective legal right to buy the freehold of your property – the existing freeholder/landlord cannot object. This right to buy the freehold is called collective enfranchisement. Once you have completed the purchase you will no longer have an external landlord. Commonly, you and your fellow flat-owners will each own a share of a company that owns the freehold. You will then be able to amend your lease and reduce the ground rent. This option can be costly up front, and take some time, but will end up saving you the most money in the long run.
Of course, you can still put your property on the market without doing anything to change the ground rent review clause, but you need to be aware that any potential buyers will likely request that you resolve the issue, or reduce the price to allow them to do so. Lenders and surveyors are more interested in this issue than ever and so are investigating all lease clauses in significantly more detail. As the agent selling the property, we also have to inform potential buyers of the ground rent situation.
There are talks of the Government looking to reform ground rent in the leasehold market, but there is no confirmation of this as it stands.
Doubling ground rent can be a tricky issue but don’t worry, we’ve dealt with it all before. Whether you have questions concerning the ground rent of your home or the property you are selling, just give us a call. We have experts on hand ready to answer any questions you may have. Our number is 0121 366 0456 – we’re looking forward to helping you.
