Ground Rent: Everything you Need to Know
ground rent

Ground Rent: Everything you Need to Know

If you own a leasehold property in England and Wales, you are probably paying rent to the freeholder or landlord of the property. This is called ‘Ground Rent’. It is a fee that is charged on leasehold properties for the land your home is standing on.

Differences between freehold and leasehold properties

Ground rent is only an issue for people who own their homes on a leasehold basis. This means you own the property for the period of time set out in the lease, which could have started anywhere between 99 and 999 years.

Typically, flats, apartments, and maisonettes tend to be leasehold, so whilst you own the property in the building, including the fixtures and fittings, you do not own any part of the building itself or the land it sits on. That said, in recent years, property developers have sold houses as leasehold properties, and this has increasingly become a problem for those owning homes under this type of tenure.

Most leases tend to be extended before they run out, but if this doesn’t happen, ownership will return to the freeholder – the business or person who owns the land and/or building. The number of years remaining on a lease can affect a property’s resale value and mortgageability, so too can rising ground rent.

Anyone who has owned their leasehold property for over two years can obtain a lease extension of 90 years and be entitled to a peppercorn ground rent under the Leasehold Reform, Housing and Urban Development Act 1993. During negotiations, the amount of ground rent is open to discussion.

Peppercorn rents

This is where, historically, freeholders asked for a peppercorn to allow them to enforce the terms of the lease to make it legally binding. The term ‘peppercorn rent’ now applies to very nominal or low amounts of ground rent.

How much is ground rent?

In the majority of cases, ground rent is an affordable cost, with some local authority properties as little as £50 per year. However, in recent years, freeholders have realised the potential for an additional revenue stream and ground rents have become increasingly onerous.

Do I have to pay ground rent?

Before paying ground rent, the freeholder needs to formally request it from the leaseholder and follow the correct procedure. Any formal demand must contain the following information:

  • Leaseholder’s name
  • The period the demand covers
  • The amount of ground rent payable
  • The freeholder’s name and address
  • The date the payment must be made by

If any information is missing, it could invalidate the demand.

What happens if I don’t pay my ground rent?

If you have received a formal valid request, you must pay your ground rent. If you do not pay, the freeholder can take legal action, such as applying for a court order to recover the money owed.

A freeholder can also apply for a ‘forfeiture action’, which aims to obtain possession of the property. However, a freeholder can only apply for a forfeiture action if the leaseholder has not paid for three or more years and they owe £350 or more. This can be either for ground rent alone, or a combination of ground rent and other administrative or service charges.

If forfeiture action is being taken against you, it is essential you get specialist legal advice as soon as possible.

Options for buying the freehold

If you want to buy the freehold of your property, you can ask the freeholder to sell you the freehold at any time. This may be possible in a couple of ways:

  • If you own a flat, you have to buy a ‘share’ of the freehold. This means that all leaseholders in the building need to come together to buy the freehold. Under the Leasehold Reform, Housing and Urban Development Act, 1993, leaseholders can act together and purchase the freehold. This is called collected enfranchisement, and the Act sets out all the formal procedures and timescales that need to be followed. It is also open to leaseholders to informally approach the freeholder to negotiate a deal.
  • If you own a house, you can approach the freeholder informally to buy the freehold of the property by agreement. But you can also buy your freehold under the Leasehold Reform Act 1967. If you decide to go down the formal route, it is recommended you get the assistance of an experienced solicitor, obtain a professional valuation of the leasehold, and make an offer via your solicitor.

A leasehold surveyor can provide you with an indication of the value of the freehold. Not only will you find out if buying the freehold is an affordable option, but you will also be able to determine whether the freeholder is asking too much.

The ground rent scandal

This has become an issue for new build properties where increasingly high ground rents are becoming commonplace. In many cases, clauses in leasehold contracts set out increases in ground rent, sometimes doubling during a set timeframe, which could happen many times during the life of the lease. Indeed, predictions from 2017 stated that ground rents for some homes could reach £10,000 a year by 2060 if nothing is done to prevent it.

Such costs impact homeowners massively, and they can find themselves stuck in contracts lumbered with grounds rents spiralling out of control. They may even struggle to sell their home. Conveyancing solicitors are likely to warn any buyer off purchasing a leasehold property in such circumstances, and mortgage providers could be reluctant to lend on homes with high ground rents, leaving sellers being forced to slash the price of their property in order to secure a sale.

It is not surprising homeowners were frustrated. Back in 2018, the government first consulted on various aspects of residential property reform, including a ban on new leasehold houses, and a cap on ground rent, amongst other things. However, progress has been slow, and until the beginning of 2021, nothing had happened.

In the first stage of its suite of reforms, the government stated its firm commitment to ‘set future ground rents to zero’, and on 12th May 2021, the Leasehold Reform (Ground Rent) Bill was introduced in the House of Lords.

The Leasehold Reform (Ground Rent) Bill

In its current form, the draft Bill prohibits the grant of new leases with a ground rent of anything more than ‘peppercorn’, as described above. Any landlord who breaches the new law will be fined at least £5,000, and leaseholders will be able to apply to the First Tier Tribunal (at The Land Registry) for an order that unlawful rents paid to their landlord are refunded.

The draft Bill excludes shared ownership leases from the reform. This type of ownership is where the tenant purchases a share in the property, usually in partnership with a housing association, and pays rent to them as their landlord. There are also exceptions for social housing and lease structures for specific funding purchases, such as Sharia finance.

However, ground rents under existing leases will be unaffected, so this change in the legislation could be of limited relief to those already stuck with extortionate ground rents. The Bill also considers anti-avoidance issues, so that ground rents are not disguised as other charges and fees and any lease granted after the legislation has been enacted but exchanged before that date will also be caught by the new legislation.

At the time of writing, the new legislation is yet to receive Royal Assent and be enshrined in law.

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