The ground rent payable on a leasehold property has started to cause concern amongst lenders and property professionals. Most leases of flats contain a covenant that the flat owner must pay an annual rent to the landlord or freeholder. This sum is known as a ‘ground rent’.
The amount of the annual rent will vary from lease to lease. It can be a peppercorn, £1 or anything above that. The ground rent can be a fixed sum for the length of the lease, or the lease can provide for the ground rent to increase over the course of the lease. The amount of ground rent payable, and the frequency and method for increasing ground rents can all affect the value of a property and the premium payable to extend the length of the lease.
When buying a leasehold property, you should ask your solicitor to advise you on the ground rent payable. You should also ask your surveyor to advise whether the terms regarding the ground rent could affect the value of the property.
Ground rents that are (or will be in the future) in excess of £250 per annum (or £1,000 per annum in Greater London), could be a cause for concern. The reason for this is that if you (or future owners) fail to pay your ground rent in accordance with the terms of the lease, the landlord has greater powers to take possession of the property and bring the lease to an end. The law treats the lease as if it were an ‘assured tenancy’ (the type of tenancy arrangement you have most likely experienced before, if you have rented in the past). This means, rather than being obliged to go through a legal process known as ‘forfeiture of the lease’ (which not only affords you more time to pay the outstanding rent but also protects your lender, whom the landlord must notify of the rent arrears) the landlord has an easier mechanism to bring the lease to an end. When the lease is brought to an end in this way it could result in there being no property interest for you or your lender.
The levels of acceptable ground rent, and whether ground rent should in fact ever be payable, are questions currently being debated by Parliament as there is growing pressure on the Government to change the law to remove this issue. There are a lot of leases which have the potential to have a ground rent in excess of the limits stated above and we are finding that lenders may not lend on such leasehold properties
As long as flat owners pay their ground rent pursuant to the terms of their lease, from a practical point of view there should not be an issue. However, because lenders have no way of ensuring that the owners of a flat pay their rent, they remain concerned by these provisions. Whilst the law remains as it is, there are ways you can remedy the ground rent issue, or make the property acceptable to lenders. These include:
1. Asking the landlord to vary the terms of the lease, so that the ground rent is below the threshold.
The landlord will not be under any obligation to agree to a variation and, even if they will agree, they may charge a fee to do so.
2. Using the Statutory powers to extend the term of the lease and reduce the ground rent to a peppercorn. Once you (or your Seller) have owned the property for 2 years, the law provides for a flat owner to have rights to extend the length of the lease. Under the statutory provisions, the rent in the new lease will be a peppercorn. Please note that in return for granting a new lease, the landlord is entitled to charge a premium.
A surveyor can provide you with an indication of the likely premium for extending the lease and this can run to thousands of pounds. However, with this option the premium is not simply stipulated by the landlord but is agreed by independent surveyors with the expertise of calculating a reasonable premium. Also, a varied lease under the relevant 1993 Act provides you and future buyers with certainty that no ground rent will be payable throughout the term of the lease.
It is possible that an indemnity insurance policy could be taken out to provide insurance against the risk that the landlord treats the lease as an ‘assured tenancy’ and brings the lease to an end without any protection to your lender’s security over the property.
There is a premium payable for these policies, but they are generally considerably cheaper than the options listed above. Proceeding with an indemnity insurance policy, does not remove the issue altogether, so it may still be an issue for any lender or future purchaser of the property. The policies may only last for a finite period of time, which could again be an issue for lenders or future buyers. Such a policy typically provides ‘lender only’ cover and therefore, if you are buying without a mortgage (or your future buyer is a cash buyer), this option will not be available to you as a means of addressing this issue.
This article is designed to educate leasehold purchasers and existing owners of leasehold properties about a potential issue with owning a lease where ground rent is payable. If you are interested in purchasing a leasehold property, or already own one, you should check the lease carefully and ask a solicitor to specifically check the ground rent position to ensure it does not affect your property.