Doubling ground rent is unfortunately a very real problem with leasehold properties in the UK. When you purchase a leasehold property, you own a lease. The lease includes clauses and information surrounding ground rent levels. What may have seemed to be an affordable ground rent when you purchased can soon be superseded if there is a doubling ground rent clause in the lease.
A doubling ground rent clause usually kicks in after a certain period of years, this could be every 10 years or every 25 years for example. This type of clause is the worst for the current owner, a purchaser and mortgage lenders.
In this article, I explore doubling ground rent further, what this means for a leaseholder, and what can be done to get out of this onerous ground rent clause.
Why Is Doubling Ground Rent An Issue?
Fresh focus on the legal sector within leasehold properties has meant that a doubling ground rent clause is causing many more issues when it comes to selling. The instant reaction when selling a leasehold property and coming across this issue the first time is; “when did doubling ground rent become an issue?”.
It is this fresh focus, combined with the fact that when ground rent exceeds £250 per annum, it is classed as an AST, Assured Shorthold Tenancy. In short, this means that if the leaseholder was to default on ground rent payments within the due date, it is easier for the freeholder to take repossession, leaving both you, and the mortgage lender with nothing. Because of this, it holds a much higher risk to a mortgage lender.
Even if your ground rent is currently only £50 a year, but has a doubling ground rent clause that kicks in in a few years, it is still becoming an issue with mortgage lenders resulting in many people having their mortgage declined due to ground rent.
Many leaseholders were never made aware of the doubling ground rent clause being a potential issue when they purchased, yet they are now finding that their properties are literally unsellable because of it.
Another type of typical clause you will see is that the ground rent rises with the rate of RPI every x amount of years. This was always considered a better clause than a doubling clause, but even this has been causing issues, especially if your ground rent already exceeds £250, which my flat did when I was selling the property.
How Can You Still Sell A Leasehold Property With Doubling Ground Rent?
Escalating ground rent can make your property feel virtually unsellable. But there are ways around this nightmare clause in a lease.
The best route is a formal lease extension which would also add 90 additional years to the lease. This will eradicate ground rent, reducing ground rent to a peppercorn (nominal fee such as a £1) aligning the property with new build leaseholds after the 30th June 2022.
Only ever go down the formal route, as informal lease extensions are fraught with issues, and once signed you’ve effectively agreed to everything.
A lease extension process can only be started if you have been the owner for 2 years. There is also the option for the current owner to start the process, and for the purchaser to finish it, but this would have to be mutually decided by both parties.
The cost of a lease extension can run into the cost of thousands of pounds, and take some months to complete. The reason it costs so much is because the premium is loosely based on the ground rent that would not be made payable over the remainder of the lease.
Freeholders are not regulated so they can also charge whatever they like for enquiries, and their legal fees. You do need a very good solicitor to get you through this process, but it has been done by many who are stuck in the leasehold trap.
Deed of Variation
A deed of variation involves making an amendment to the existing lease. This could involve stopping the escalating ground rent in the future and stopping it at its current level, thus removing the doubling ground rent clause. This can also cost thousands of pounds, and from my research, a formal lease extension is a much better option.
Another issue with a deed of variation is that the freeholder could just swap the doubling ground rent clause to the ground rent increases with the rate of RPI, which is actually not a better solution.
If the ground rent is above £250 outside of central London it will be classed as an assured tenancy and you risk losing your home if you fail to pay ground rent, the figure is £1,000 and over in Central London.
The only way to completely remove the ground rent is to do a formal lease extension. However, the costs to achieve all of this may be quite prohibitive, so sellers can be reluctant to do this.
There have been many cases where sellers have pulled out and re-listed to cash buyers at a cheaper price because of the lease defect, and it then removes the issue with mortgage lenders. Although, the lease defect still remains which could affect their onward saleability.
Be prepared that with leasehold flats you only ever own the right to live in the properly for a specific length of time as specified by the lease, and unless you have right to manage in respect of the management of the building, you also have little say in the service charges and maintenance of the building. Service charges are something that are seemingly uncapped and can cause just as much as an issue in the future.
Doubling ground rent indemnity insurance can be taken out to protect mortgage lenders against this onerous ground rent clause. This route is becoming less accepted by lenders because ground rent issues have become such a widespread issue. It is very much dependent on who the lender is and what their lending terms say about ground rent.
An indemnity policy for something like this would not cost more than £100 to setup. As a seller, it’s still worth offering this option before parting with thousands of pounds to try and shift the property. Although, it offers no protection to the new purchaser.
A doubling ground rent clause is not one you want to find on a lease of a property you’re trying to sell, or buy. The recent focus on onerous levels of ground rent is what is causing issues among mortgage lenders, and it’s not going away.
Whilst the leasehold reform for existing leases has currently been shelved, there is hope that in the future all ground rent terms will be reduced to a peppercorn. If you are in the stages of trying to purchase a leasehold property with doubling ground rent terms, you need to be fully comfortable with, and clear about what leasehold flat living means, including service charges which are uncapped.
After my experience of owning and selling a leasehold property, I would personally never buy leasehold again after my experiences, but I know and understand from my own experience that leasehold is sometimes the only option.
Always seek professional advice from your solicitor if you are in doubt on the best way to proceed. For more help and advice, I would also recommend joining the National Leasehold Campaign Facebook group.