How to safely get off the escalator

The issue of ground rents payable for leasehold properties has attracted negative publicity recently; particularly so called ‘escalator’ ground rents.  These are rents that escalate over time, for example doubling every ten years. This can lead to leaseholders paying thousands of pounds for properties they already own. This is a problem not only for owners of flats, but also owners of houses.

What problems are lenders facing?

While costs to homeowners are the most visible problem, they are not the full story.  Lenders are taking an increasingly tough line and, in some instances, are refusing to provide mortgages where there are steep or frequent ground rent escalations during the term of the lease.  If a potential buyer cannot secure a mortgage on a lease, this has a negative impact on the ability of a lessee to sell.

An additional consequence of escalator ground rents is that leaseholders can lose out on protections normally available to long leaseholders.  If the ground rent rises above £250 per year (or £1,000 per year in London), there is a risk that the tenancy could be considered an assured shorthold tenancy (AST).  This results in the freeholder having more avenues to potentially exploit to bring the lease to an end and the leaseholder losing rights such as the right to first refusal on the sale of the freehold.

So what are the options for a leaseholder?  One option is for a leaseholder to use its statutory right to extend the remaining term of the lease by 90 years.  This has the effect of reducing the ground rent payable to a peppercorn thereby bringing to an end the escalator provisions and avoids the risk of the lease being considered an AST.   The downside of this approach is the leaseholder has to pay not only its own legal and surveying fees, but also the reasonable professional fees of the landlord, in addition to a premium.

As Tom Olden of Olden Property Consulting comments:

Although extending a lease through the statutory lease extension process can seem long winded, it was designed to protect the interests of the leaseholder. More and more often I receive calls from clients who tried to extend their lease ‘informally’ to avoid paying professional fees, only to realise six months into negotiations the offer from the freeholder was not as good as it initially seemed, mainly due to escalating ground rent provisions. The benefit of selling a lease with a peppercorn ground rent cannot be over stated.

If you are thinking of extending a lease a simple tip I can give is to check your lease ASAP. It is advisable to extend a lease if there are less than 90 years remaining, however once the term is less than 80 years it is considerably more expensive as an additional sum known as ‘marriage value’ becomes payable to the freeholder.

What are the alternative options to a lease extension?

An alternative option to lease extension, if there are a group of lessees in a similar position, is to band together to purchase the freehold.  Once the freehold is acquired, usually through a company created by the residents, the group of residents can then grant themselves new leases on favourable terms.  As with lease extensions, the residents have to pay their costs as well as the reasonable professional fees of the freeholder and a premium.  Owners of leasehold houses have similar rights to extend their lease or to acquire the freehold subject to payment of fees and a premium.

The Government has promised to crack down on unfair leasehold practices and the Law Commission is currently consulting on proposed changes.  Some developers are voluntarily changing leases with escalator ground rents, but will usually only do so if the homeowner has purchased directly from them.  If the property has already been sold, the new owners often have no recourse.

Existing leaseholders need to check their leases for escalating ground rents in particular and, if they have them, act quickly to avoid losing out on key rights.  The premium payable will be more expensive the closer the lease gets to its expiry date.

Guy Evans is a Solicitor in the Dispute Resolution team at Thomson Snell & Passmore LLP, specialising in property disputes. Tom Olden is a surveyor and director of Olden Property Consulting, specialising in leasehold valuations, enfranchisement and compulsory purchase.