Onerous levels of ground rent are a rising problem within leasehold properties.
Old leases with doubling ground rent clauses, extortionate opening levels of ground rent, and those that rise with the rate of RPI are unfortunately what underpins a lot of current leases for leasehold properties.
£50, or £200 ground rent per annum might not be a problem for you financially, but it can cause a myriad of issues when it eventually comes to selling. As I found out when I sold my flat where the ground rent exceeded £250 per year (outside of London).
Sales are falling through all over the country as ground rents over £250 are becoming increasingly problematic.
It continues to be an issue whilst the leasehold reform has been shelved. Brand new leases (effective from 30th June 2022) now have to be initiated with peppercorn ground rent (£0.00 or a nominal fee such as 50p).
However, current leases are still affected by ground rent, in this article I explore whether ground rent can affect the saleability of a leasehold property.
What Is Ground Rent?
Ground rent is charged annually by the freeholder which is essentially a charge for the land that your property resides on, in accordance with the lease. Ground rent is for zero service and does not go towards maintenance of the property.
Can Ground Rent Affect The Sale of A Leasehold Property?
Onerous levels of ground rent and specific clauses can wreak havoc with the saleability of a leasehold property.
This mainly causes issues with mortgage lenders not releasing funds due to astronomical ground rent charges, now and those that increase in the not so distant future.
Here are some of the ground rent issues currently affecting sales of leasehold properties in 2022.
Ground Rent That Exceeds £250 Per Annum
One of the biggest issues surrounding ground rent is where the current ground rent already exceeds £250 year (outside of London, £1,000 within London). When I was selling my own flat earlier this year, this issue reared its head for the very first time, I had no previous understanding, or realisation that this would ever be an issue. It’s a very expensive issue to not be aware of.
The issue with ground rent over £250 is that when it gets to this point, it is classed as an assured shorthold tenancy agreement. This essentially means that if you were to default on your ground rent payments then the freeholder could exercise their rights to regain possession of the property.
Whoever is purchasing your leasehold property might be like ‘but I’ll always pay on time’, that’s great, but the mortgage lender doesn’t know that.
It carries a huge risk for mortgage lenders because of the potential that the freeholder could gain possession of the property, and the lender wouldn’t have a say in it.
So, what’s the solution? Mortgage lenders will point blank not lend if the ground rent is currently £250 per annum, OR close to hitting this point if there is a doubling clause, for instance.
Deed of Variation
mortgage lenders all seem to initially be asking for a deed of variation from the seller to resolve this ground rent issue.
This would involve making an amendment to the lease where the ground rent is capped at £250 for the remainder of the lease. The main issue with this is that it could cost thousands of pounds to do so, and the ground rent is still £250 per year. For transparency, I was quoted around 10k-14k for this by my freeholder.
Formal Lease Extension
The better option is to start a formal lease extension. This adds 90 years to the remaining term of the lease and the key part here is that is also reduces the ground rent to a peppercorn.
This makes the property highly attractive to purchasers, but this does also come with a price tag. Using an online lease extension calculator will give you a general ballpark figure for how much this might cost.
An indemnity policy for ground rent is NOT a solution that always works, but it is an option that can be suggested and put to the mortgage lender. An indemnity policy for ground rent is designed to protect the lender if the leaseholder was to default on ground rent payments.
The mortgage lender may accept this (which my purchasers lender did), however, the purchasers solicitors will advise their client on the risk of purchasing a property on this basis, as it will cause onward saleability issues for them too. At this stage it is just whether the purchaser is comfortable knowing this too.
Indemnity policies are not always accepted by the mortgage lender, and more lenders financial handbooks are being updated that state they don’t accept them.
Doubling Ground Rent Clause
Your current ground level may fall beneath £250, but any increasing ground rent clauses could cause further saleability issues.
A doubling ground rent clause has often always been considered as worse than those that rise with the rate of RPI, but even now they are being considered on par with each other.
Doubling ground rent clauses are often set to rise every between every 10 or 30 years. Your ground rent may only be £100 now, but in 20 years time it could be £400 per year which opens up the £250 AST problem, whilst it’s just going to continue doubling every 10 years. It is madness.
The worst thing about doubling ground rent is that it doesn’t go towards anything to do with the property. It is literally a clause that provides greedy freeholders with more money for doing nothing.
What are the solutions?
The deed of variation or formal lease extension can both be undertaken to remove this issue, however, the formal lease extension is again a more favourable route.
Ground Rent RPI Increase
If you don’t have a doubling ground rent clause, it’s likely that your lease may have an RPI clause. This means that your ground rent is increased every X years in line with RPI.
Whilst the doubling ground rent clause was often considered worse, with the extortionate rise in the cost of living in the UK and with inflation being at its highest in 40 years, this is going to have a massive impact on ground rents that increase in line with RPI.
The Competitions and Markets Authority (CMA) issued a report in early 2020 where they expressed concerns regarding RPI linked ground rent clauses. They stated:
“…we have significant reservations about RPI based increases to ground rent. Moreover, lease provisions imposing ground rent and providing for its escalation to be obscure and hard to understand.”
Many mortgage lenders will not lend on RPI leases that are currently more than 0.1% value of the property, or with a ground rent more than £250 (outside london).
Many lenders are requiring a deed of variation, or formal lease extension which will also remove the ground rent issue.
Freeholders know that the RPI increases will become unreasonable very quickly and the only way out is extending the lease.
If you have any of the above ground rent issues, another route but not concrete solution is to offer it at a significantly reduced sale price (due to the lease defect) to cash buyers only that are not affected by the rules of mortgage lenders.
In summary, ground rent can absolutely, and does affect the sale of a leasehold property. With significant and fresh focus on the ground rent of leasehold properties, as long as the leasehold reform remains shelved, onerous ground rent issues remain a huge problem for leaseholders trying to move on and sell their property.
Owning a leasehold property is essentially buying a pile of bricks and accepting deferred debt.
Both deed of variations and formal lease extensions can cost anywhere in the region of thousands of pounds which quickly eats into any profit you hoped to make from your investment.
There are solutions to ground rent issues to make your property highly attractive to prospective buyers, but it takes some time and money getting there.
If you are on the other side and looking to purchase a leasehold property, do your research, ask the right questions about the lease and ground rent and seek advice from a solicitor before committing.
I am not a legal expert but have had considerable experience with the issues surrounding ground rent whilst selling my own leasehold property. Please feel free to leave me a comment or drop me an email if you are looking for any advice, good luck!