9th July 2018

Ground rent – some important questions answered

Taylor Wimpey’s recent decision to set aside £130 million pounds to settle ground rent disputes has attracted a lot of media attention. So too have stories about exploitative ground rent provisions which have resulted in some home owners becoming liable to pay thousands of pounds a year and who may face difficulty trying to sell their property.

In this article Sarah Harris, residential property lawyer with MacDonald Oates LLP based in our Petersfield office, explains what ground rent is, why it has become so controversial and what you should do if you are affected.

What is ground rent?

Ground rent is money that you have to pay, usually once a year, to occupy the land on which your house or flat is built.  It only applies where the property you own was sold to you on a long lease, rather than if you purchased the freehold interest in the land.  In these circumstances, you will not own the land on which the property it is built and so pay ground rent to the landlord in order to occupy the land.

How do I know whether I have a lease?

When you bought your property, your solicitor should have explained whether you were buying the freehold interest in the property or just a right to occupy the property for a set number of years subject to certain conditions, known as a leasehold interest.  If this is the case, your solicitor should have provided you with a copy of the lease when you purchased the property, and a summary of the terms contained within it.

Historically, flats have tended to be sold on a leasehold interest and houses on a freehold interest but this has begun to change. For example, on new housing developments it is becoming more common for long leases to be granted in respect of houses.

Why all the controversy?

Ground rent has become controversial because of the way it is now being calculated in some instances.  Traditionally, the terms of the lease would ensure that ground rents would be kept at a consistently low rate of no more than a few hundred pounds a year for the term of the lease. However, some landlords have begun to include provisions in leases which double ground rents at set intervals, causing the costs to run into many thousands of pounds after a number of years. Aside from the issue of the property owner being unable to afford the ground rent in the future, mortgage lenders are also now becoming more cautious of these escalating ground rents and may refuse to loan against such properties.  It may, therefore, be difficult to sell the property in the future.

Take, for example, a lease granted for 110 years which starts off with an annual ground rent of £300 but which will double every 10 years.  By the time the lease has been in place for 55 years the ground rent will have risen to £4,800 per year.  If the lease provides for the ground rent to double every 5 years, the charge will have risen to £153,600 per year which would be unaffordable for most people.

Do I have to pay doubling ground rent? 

If you have signed up to a lease which requires the payment of ground rent then it must be paid, even if the amount being claimed seems excessive.  Unlike other leasehold payments that need to be made (such services charges for repairs and maintenance) there is currently no requirement for ground rent charges to be reasonable and no current mechanism available to challenge them where they are obviously unfair.  Failure to pay ground rent when properly demanded could result in you being taken to court to ensure payment is made and may even lead to you being evicted if payment is still not forthcoming.

However, the government has announced that it will be taking steps to the address the problem and as a result of this some developers are now offering to alter the terms of their leases to ensure that ground rent payments are kept at an acceptable level and any increases are tied to the rate of inflation.

Different developers are offering different schemes and it is important that you seek legal advice before trying to negotiate any changes.

If you have owned a leasehold property for at least two years it may be possible for you to apply to extend the length of your lease and avoid having to pay any further ground rent in the future.  However, lease extensions are a complicated area of law and you may need to pay an additional sum (referred to as a ‘premium’) to the landlord in exchange for the landlord extending the term of the lease.  As such, you should seek specific legal advice as early as possible should you wish to explore this possibility.

I am just about to buy a leasehold property and am now worried.  What should I do?

If you are on the verge of buying a leasehold property it is important that you make sure that you fully understand the ground rent obligations contained within the lease and  talk to your solicitor about any concerns you have.  Ask your solicitor to provide you with a comprehensive summary of the terms of the lease and make sure you read it carefully.

To find out how our leasehold experts can help, both with existing ground rent disputes and future leasehold purchases, please contact Sarah Harris on 01730 268211 or email sarah.harris@macdonaldoates.co.uk.

The contents of this article are for the purposes of general awareness only.  They do not purport to constitute legal or professional advice.  The law may have changed since this article was published.   Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.