Ground rent escalation clauses in leases
Concerned by escalating ground rent clauses or a doubling ground rent on the lease of your home?
What is ground rent?
As a leaseholder, ground rent is a fee you must pay to the freeholder of your property as a condition of the lease.
Ground rent is usually a nominal sum of £50 to £200 a year, but it can be significantly more depending on the terms of your lease.
Can the cost of ground rent increase?
Historically, leases included fixed ground rents but more recently, most new-build property leases contain rent escalation clauses which allow the ground rent to be increased. It may increase by fixed amounts at set intervals or it may increase at a later date in accordance with a recognisable formula such as the retail prices index (RPI).
You may have seen publicity about ground rent escalation clauses in residential leases and the impact they can have, particularly if the escalation is too rapid, or a clause which doubles the rent at any time.
What problems do escalating or doubling ground rent clauses cause?
It can be more difficult to sell a leasehold property which has a doubling ground rent charge that rises after 10 years.
To illustrate, an initial ground rent of £250 per year, which doubles every 10 years, would be £64,000 after 80 years!
In time, the higher ground rent will increase the value of the freehold reversion as an investment and decrease the leasehold value. This will increase the cost of a lease extension, when you need to obtain an extended lease term from the freeholder. Most mortgage lenders will require this when a lease has 80 years or less of its original term remaining.
If the rate of increase is high or the dates of the stepped increases are too short, this will probably impact on the marketability and value of your property.
The ground rent payment can also be relevant to statutory provisions affecting the lease. For example, where annual ground rent exceeds £250 (or above £1,000 in London) the lease can become classified as an assured tenancy. Under the Housing Act 1988, a freeholder has the ability to seek possession of the tenancy if certain grounds are established and, if these grounds can be proved, the court must make an order for possession in favour of the landlord, which will then terminate the long lease.
If you are concerned about ground rent or any other leasehold issues, it is important to seek advice from a legal professional.
Linda Crawford is a solicitor in the property department at Barker Gotelee, Suffolk Solicitors.
This article appeared previously in the East Anglian Daily Times, May 2019.
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