Purchasing a flat, a leasehold property creates many more caveats, and issues as opposed to purchasing a house. As I’ve spoken about before, flats are a brilliant investment opportunity for single buyers, those wanting to get a step onto the property ladder and investment opportunities due to the generally lower property prices.
However, whilst you may think flats are a better option, you need to be fully versed on everything the lease pertains before going one step further with the purchase. I purchased my first home, a flat 5 years ago and I have learnt the very costly mistakes and the difficulties at selling the flat which is why I want to be able to educate and stop others from making the same mistakes that can affect your future, saleability of the flat and your disposable income.
It was only when I was selling my flat, in fact 3 months in when I thought we were due to exchange that the issue surrounding the £250 ground rent issue arose. This was the first time myself, and my mortgage adviser had been made aware of this issue and one that is becoming, and is affecting thousands of people across the country. In this article, I explain the £250 ground rent issue outside of London, what this means, what can be done if you own a flat with ground rent in excess of this, and whether you should consider buying a flat on the market with a ground rent of £250 or more.
What Is The Issue With Ground Rent Over £250?
There has been fresh focus within the legal property sector on the issue of ground rent levels which, if they fall within certain levels prescribed by the Housing Act 1987 (‘the 1987 Act’) could mean that a long lease is deemed to become an assured shorthold tenancy (‘AST’).
For a tenancy/lease to treated as an AST, the following conditions have to be met: (a) The tenant/leaseholder is an individual (not a company); (b) The property is the tenant/leaseholder’s only or principal home; and (c) The tenancy/lease is not one of the exceptions set out in the 1988 Act.
Long leases are not one of the exceptions listed in the 1988 Act. However, the 1988 Act provides that a tenancy/lease cannot be an AST if it is for a rent lower than £250.00. p.a. (£1,000.00 in London) or higher than £100,000.00. Therefore, if you breached the covenant by defaulting on your rental payments, the landlord could obtain possession of your Property (i.e. terminate your lease) by following the procedure set out in the 1988 Act. Most leases have a forfeiture provision (which allows a landlord to terminate the lease if you breach any of the terms) and if the landlord seeks possession of the Property by a court order on one of the grounds set out in the 1988 Act, there is no right to apply for relief.
Whilst you might be thinking this is not an issue because I have no problem paying my ground rent on time, this becomes an issue for your mortgage lender. The lender does not know you, or necessarily trust and take your word for the fact that you will pay the ground rent. So, say if you didn’t pay your ground rent within the demand date, the landlord could potentially take possession of the flat, leaving your lender with nothing to recoup their money. Due to this, lenders have become more wary and will simply not lend for flats with a ground rent which already exceeds £250 outside of London, or £1,000 in London.
However, this is only one side of the story. The other issue with the ground rent already being at this level is what the terms in the lease state for future increases to the ground rent. Some leases state that ground rent is to be doubled every 10 years, whilst some will increase with the current rate of RPI at that time. The latter is generally favoured more by lenders. If you are purchasing somewhere with a ground rent of £150 but it is set to double every 10 years, then this becomes an issue because within 10 years (or less depending on the year of increase) your ground rent will already exceed the £250 figure, and it will keep doubling every 10 years there forth. Most mortgage lenders state that the ground rent should be no more than 0.1% of the property price. With a ground rent which doubles every ten years, this will duly become more than 0.1% of the property price over time.
Can I Still Buy A Flat With Ground Rent Over £250?
Whilst mortgage lenders are very wary and will not lend on a flat with ground rent exceeding £250, this does not mean that they won’t lend full stop, but you will need to meet certain conditions for the sale to go through. These conditions will need to be met by the seller of the flat and there are a number of different ways that getting through this rent loophole can be achieved.
Deed of Variation
A deed of variation of the lease is the most enviable and first port of call that your solicitor will ask your seller for. A deed of variation involves making legal changes to the lease which would cap your ground rent at its current level, and stop it rising in the future. The deed of variation protects not only the lender, but yourself too. A deed of variation can cost the seller thousands of pounds though, so often it is not actually an option for many sellers. There are other ways around this.
Another thing that can be done in deed of variation is by extending the lease. Using the statutory powers to extend the length of the lease and reduce the ground rent to a peppercorn (No, we’re not talking spices. This means being reduced to a small or insignificant amount of ground rent). This can only be done if the seller has owned the property for 2 years. There is no guarantee the landlord will accept this request though, and a premium will be made payable due to the amount of ground rent that the landlord will miss out on over the years.
Indemnity Insurance Policy
Whilst an indemnity insurance policy will NOT protect the buyer, it will protect the mortgage lender and whilst lending terms vary from lender to lender, most will find this acceptable and will lend on this basis.
The type of indemnity policy is called a forfeiture of lease insurance. This provides a lender with additional protection against financial losses that they could suffer in the event of the landlord forfeiting the lease, which is the security for a loan that they have provided. This would mean that even if the leaseholder didn’t pay their ground rent on time, the lender would be protected from the landlord forfeiting the lease.
Taking out this indemnity against the lease is by far the cheapest and most amenable way of avoiding this ground rent issue. The indemnity policy is drafted by the purchasers solicitors before being sent to the lender for approval. This indemnity policy is charged to the seller and can be anywhere between £50-£100, generally.
Should I Buy A Flat With Ground Rent Over £250?
I can only speak this from personal experience and weigh up the above scenarios regarding buying a flat with ground rent over £250. There are still thousands of flats on the market with levels of ground rent lower than this. However, you need to be made aware of these ground rent provisions and terms of the lease before going any further as this is not something you want to find out when you are two months deep into purchasing the property.
So, what if you are in the process of purchasing your dream property with a ground rent of £250 and just get made aware of this? Firstly, it is completely dependant on the seller whether they will do a deed a variation or will instead offer an indemnity policy. Remember, this is only if your lender would even accept an indemnity – they will usually only lend on specific conditions.
Some deed of variations can cost the seller between £600-£800, however, this is extremely unusual. Landlords are unregulated which means they can charge whatever they like. It could have cost me thousands of pounds to get a deed of variation. As an idea, I was quoted £2,400 + premium. The bad news is that you are not made aware of what the premium is until you pay the initial amount of money, I was told that in some cases it has been £10,000, some £14,000. This is because they need an indication of the likely premium for extending the lease/ or varying the lease, based on the ground rent they will be missing out on. This holds so much risk for the seller too if you were to pull out. BUT, this is the best way, and in my opinion the only way if I was to do things now with purchasing a flat with a ground rent over £250 because it protects the lender, and YOU.
You also need to ensure that the flat you are purchasing is sellable and doesn’t have a lease with a defect, which this represents. Also, it protects you from astronomical ground rent hikes that can cause issues with your finances in the future. You need to protect yourself and if the buyer isn’t willing to offer a deed of variation, I would tread very carefully. No matter how much you love the property, sometimes you have to walk away from something that doesn’t stack up.
One thing to note is that thousands of leaseholders are currently being affected by this issue. In my opinion, leaseholders are only being made aware of this issue as they are selling the property. The Leasehold Reform (Ground Rent) Bill is currently progressing through the House of Commons, however, this bill which is due to reduce ground rent to a peppercorn rate will not be retrospective. On leases that have been created before the bill, ground rent can still be charged at uncapped levels. Flats make up a huge part of our housing economy, as well as being a foot onto the ladder for many single people and first time buyers. Because of this there is growing pressure on the Government to change the law to remove this issue with ground rent. This is ongoing and has been delayed due to COVID, so as time goes on here’s to hoping that a more widespread legislation will apply to all ground rent charges.
As a leaseholder who owned a flat and has now sold it with a £250 ground rent and experienced these issues, if you ever need any advice then please do get in touch. I must advise I am not a legal expert but have been guided throughout this process by solicitors and have learnt this information first hand. I cannot recommend enough joining the Facebook group National Leasehold Campaign which is a wealth of information relating to this issue.