Leasehold Properties with Ground Rent Clauses Explained
30 August 2018
Owners of leasehold properties are typically required to pay an annual ground rent to the freeholder. For older leases usually this would be a relatively small amount of money, which would increase every 25 or 33 years by a fixed sum. However some new-build leasehold houses and some lease extensions for flats have ground rent clauses written into the lease which cause ground rents to increase exponentially, meaning that homeowners soon become liable for astronomical charges and their homes become unsellable.
What is Ground Rent?
If you own a property on a leasehold basis, this means that you don't own the land on which your property is built, but you are a tenant on this land for the duration of the lease. The land itself is owned by the freeholder (this may be the person or company that built the property) and you will need to pay an annual ground rent to the freeholder for the duration of the lease.
Most flats are leasehold. It's less common for houses to be sold on a leasehold basis, but there are still a significant number of leasehold houses out there, including many built in recent years.
Historically, ground rent was as low as a few pounds a year or a "peppercorn" and some freeholders didn't even bother to collect this. However, in the last 10 years, some developers have begun inserting ground rent clauses in the terms of the lease for new houses that would see the ground rent escalate to eye watering levels. Some flat owners who privately negotiated a lease extension have also been subject to similar increases.
How Do Ground Rent Clauses Work?
As new leasehold homes have been developed, some developers have granted leases for much longer terms, even up to 999 years, and written additional clauses into the leases when outlining the ground rent liability for the homeowner. The initial ground rent figure for these homes is generally more than a typical ground rent, but not astronomical, at around £300-£500 per year. The additional ground rent clause then sets this rate to double after a set period of time. This is typically every 10 years.
So, for example, if a new home is sold with an annual ground rent of £300, then after 10 years the homeowner will become liable to pay £600 per year in ground rent. This figure continues to double each decade, with the annual ground rent reaching a staggering £308,200 by the 100th year.
Because the ground rent is set to escalate to such an extortionate figure, many lenders now refuse to lend against these homes, making them incredibly difficult to sell. Even without a mortgage, buyers that understand the implications of the ground rent clause would certainly be put off.
Many homeowners were not made fully aware of the implications of these ground rent clauses when they bought their homes, and now find themselves trapped. One way out for homeowners would be to purchase their freehold, but freeholders are demanding tens of thousands of pounds for these freeholds, making it completely unachievable for most homeowners.
What Is Being Done?
The UK Government has acknowledged this practice as being unfair and exploitative, and in June 2017 it announced that it would introduce measures to put a stop to it. For more information see Unfair Leasehold Terms – What are Your Legal Rights?
The Government has now announced that it will be going ahead with a ban on leaseholds on new-build houses, and that developers will be forced to cut controversial ground rents to zero on all new houses and flats.
They have also said that they will make it easier, quicker and cheaper for homeowners to purchase their freehold or extend their lease.
Pressure is also being put on developers to alleviate the unreasonable financial burden they have placed on existing homeowners. Some developers, including Taylor Wimpey, have agreed to compensate buyers, while other developers are standing their ground.
Even those developers that are seeking to make amends will only compensate homeowners who have bought directly from them. So if the house has already changed hands then the current owners will not receive any support.
The reforms that have been announced by the Government have been welcomed by groups campaigning for change. However, there is still some concern over how long these changes will take to come into effect.