What is Ground-rent?
When a Property is sold as leasehold, the buyer is only a tenant with a very long term rental. The ground/land the home is built remains in the hands of the freeholder. The home buyer therefore has to pay an annual “ground rent” to the freeholder and has to ask the freeholder for consent if they want to make any changes to the property, such as building a conservatory or changing the windows.
Ground-rent Issues?
In 2018, 10,300 Leasehold properties were registered through the Land Registry, as compared with 3,400 in 2010. In the past, leasehold property owners were generally charged either a peppercorn or minimal ground rent, sometimes as little as £1 a year. Many freeholders did not take steps to collect the same.
However, a more common occurrence seen in recent years is for developers to insert clauses into leasehold contracts setting the ground rent at, for example, £200-£400 a year, doubling every ten or fifteen years. It has been estimated that the average ground rent is currently £371 per year.
Although unsuspecting first-time buyers were frequently told that 999-year leases were “virtually freehold”, these clauses mean that their ground rent would soon spiral to unaffordable levels. The Leasehold Knowledge Partnership, which has vigorously campaigned on this issue, estimates that around 100,000 home buyers are trapped in contracts with escalating ground rents, which in turn can be difficult to maintain and sell on.
Reform?
The long campaign of the Leasehold Knowledge Partnership to reform the leasehold system in England and Wales has recently triumphed – with a series of announcements made by the Communities Secretary – James Brokenshire.
Brokenshire confirmed that all new-build houses will be sold as freehold in a bold move to tackle unfair leasehold practices and prevent future home-owners from being trapped in exploitative financial arrangements.
The Secretary of State has also instructed Homes England to renegotiate Help to Buy contracts to explicitly rule out the selling of new leasehold houses, other than in exceptional circumstances, to protect new home buyers from unscrupulous and unaffordable charges.
Furthermore, in a bid to prevent extreme ground-rent charges, some Lenders are refusing to grant loan facilities if the ground-rent over the property is too high. The lenders are in fear of mortgage repayment default by the borrowers due to other large financial commitments.
The government has been persuaded by the arguments put forward by the Partnership and other authorities that new ground rents for Leasehold properties should be set to ‘zero’ in the not too distant future, to improve the Leasehold property market and encourage first time buyers to get on the ladder.
Existing Rent Clauses?
These are all positive steps, but what happens to these property owners who already face mounting rents?
Help may be at hand. A number of developers have signed a government pledge to identify leases with doubling ground rents and to agree to amend such clauses so that the increase is linked to RPI.
If you have a lease with a doubling ground rent, please consider making an application to your landlord to amend the same.
For further assistance contact our residential conveyancing team on 01483 451 900 or make an online enquiry here.