What is ground rent?
Owners of leasehold residential properties will often need to pay an annual rent to the person who owns the freehold of the property. This rent is known as a ground rent and is payable in addition to the initial purchase price of a leasehold property. Historically, ground rents were fixed at a very low rate and often just a peppercorn or a nominal £1. During the last ten years, higher ground rents have been introduced along with escalation clauses which cause ground rents to rise sharply over a period of time and in many cases have escalated to thousands of pounds causing financial distress to leaseholders.
What are the consequences of a high ground rent?
The Government has expressed concern that ground rents have risen sharply. Mortgage lenders will no longer accept leasehold properties unless the ground rent remains at a reasonable level throughout the duration of the lease. An oversight when purchasing a leasehold property can prevent a property from being mortgaged, affecting the value and marketability of the property in the future. Owners of such leases have faced difficulty selling their property.
There has also been a lot of media coverage regarding rising ground rent and an unintended consequence. Where ground rent exceeds £250 per annum (£1000 per annum in London) a lease may, through the provisions of the Housing Act 1988, be classed as an assured shorthold tenancy (AST).
If the lease is classed an AST, the leaseholder becomes vulnerable to a mandatory Ground 8 possession order if the ground rent falls into arrears for three months. As Ground 8 is a mandatory Ground, a court will have no discretion and will be obliged to grant the landlord a possession order. This means that not only does a leaseholder face losing their home, they will also forfeit any purchase price paid at the time of buying their property. This will also prejudice any mortgage lender that has an interest in the property.
I am purchasing a leasehold property, what should I do?
Careful consideration must be given to ground rents and the effect of any ground rent increase clauses when purchasing a leasehold property. Whilst a leaseholder may not be concerned about the risk of a landlord terminating the lease for ground rent arrears, given that it is within the leaseholders control to ensure that ground rent is paid on time, the solicitor acting on a purchase must ensure that the lease will be acceptable to a mortgage lender and ensure that the property is marketable in the future.