The problem with Ground Rent

There are currently around 10 million leaseholders in England and Wales who own the right to occupy their home, but the building or land is owned by a freeholder landlord. And for some who’s leases were granted on or after 1 st April 1990 (but before 30th June 2022), they could find themselves trapped by worrying ground rents that are either doubling or increasing in line with the retail price index rate of inflation.

Ground rent is paid by the flat owner (or leaseholder) to a landlord (generally the freeholder), for living in their property. The details of any ground rent payable are contained in the lease.

Recently, the Housing Minister Michael Gove planned to reduce all ground rents to a zero (peppercorn) rate, which he hoped would give landlords the incentive to sell the freehold to leaseholders, leading to a phasing out of the practice. In January last year, Gove told the press that he wanted to abolish leasehold, which he described as an “outdated feudal system that needs to go”.

This provision to be added to the bill would have gone further than the cap on ground rents for new homes, introduced in 2022 and reforms in 1993 to enable leaseholders to reduce their ground rent to a peppercorn when extending their lease by 90 years.

However, the proposal was quietly abandoned after Gove and officials at the Department for Levelling Up, Housing and Communities met fierce resistance from the Treasury. It follows the intensive lobbying campaign by pension funds, some of which have invested billions in buying up freeholds for blocks of flats.

The Treasury have been warned that Gove’s plans could wipe out between £15 - £40 billion of investment, which could significantly affect individual pensioners. Housing campaigners have protested however, that the negative impact to pension funds has been greatly exaggerated.

Lawyers for the Government have also warned Gove that making retrospective changes to property rights could leave ministers open to legal challenge. But sources close to Gove insist the legal advice did not state the policy would be unlawful.

“Gove has instructed officials to keep fighting but they know they are fighting on losing ground,” a source said recently. “The wider danger is that they lose the peppercorn thing entirely.” A second source said neither the PM nor the Chancellor, Jeremy Hunt seem willing to get involved to try and resolve this contentious issue.

Gove is now desperately seeking a compromise that would prevent his reforms from being totally undermined. He is pushing the Treasury to accept a halfway house, which would see all ground rents capped at £250 a year. This is currently expected to be the most likely outcome, but has not as yet been confirmed.

Capping ground rents at £250 annually is likely to make freeholds less attractive to investors and help leaseholders struggling to sell their properties. But it would also make extending the lease term or buying the freehold more expensive for leaseholders as they would have to compensate the freeholder for income lost.

Reducing ground rent to a peppercorn would vastly improve the lives of many leaseholders where clauses in their lease mean that the annual charge will double in around 20+ years. The additional knock-on effect is the difficulty of selling a property with such a high ground rent, as buyers will often struggle to get a mortgage based on this.

Some of the potential Ground Rent issues include:-

Repossession

If a leaseholder’s ground rent is above the £250 threshold (or £1000 in Greater London), the lease may be considered an assured tenancy. Therefore, in the event of falling into 3 months of ground rent arrears, the landlord has a right to repossess the property. For an assured tenancy, a landlord can issue a notice to repossess the property under section 8 of the Housing Act 1988.

Landlords usually have a provision in the lease known as forfeiture, which allows them to evict the leaseholder if they break a term or terms of the lease, such as not paying ground rent or not keeping the property in repair.

However, under section 8, landlords have an easier way of repossessing the property. This involves the freeholder serving a section 8 notice to evict and enforce their right to repossession, thereby ending the lease and leaving the freeholder and lender no interest in the property and having to vacate.

Buying with a mortgage

Some lenders are reluctant to lend on properties with ground rents that exceed £250 outside of London and £1,000.00 in Greater London, due to the risk of potential repossession by a landlord, in the event of ground rent arrears. Many lenders also prohibit lending where the lease allows the ground rent to be increased (and often doubled) during the first 21 years.

Selling to a buyer who has a mortgage

This issue has recently become increasingly problematic when a leaseholder puts their flat on the market to sell. This is because a prospective buyer might need to apply for a mortgage to purchase the property and could encounter difficulties finding a lender because of the reasons outlined above. Therefore, any ground rent related complications may potentially result in a sale falling through.

Ground Rent Act

The Government introduced the Ground Rent Act which applies to all new leases granted from 30^th June 2022. The Act prevents the ground rent for any newly created lease being higher than a ‘peppercorn rent’ (nothing) per year.

If however, the lease was granted before 30^th June 2022, it may be prudent to consider the following options:-

Deed of Variation

One of the first and most often preferred option, is entering into a deed of variation of the lease. This is an agreement between the leaseholder and the landlord which allows the terms of the lease to be changed. With the agreement of the landlord, the ground rent can be reduced below the threshold and then documented within the deed. A deed of variation can also deal with any other required alterations relating to the lease.

Please note that the landlord may charge a premium (price) to compensate for the loss of rent moving forward and will also undoubtedly require their legal fees to be met.

Indemnity Policy

The second option which is less preferred than the deed of variation, is purchasing an indemnity policy. This is an insurance policy that covers a defect which may not be resolvable. Therefore, instead of trying to fix the issue, an insurance policy is taken out to protect the leaseholder’s interests and if applicable, also the interests of the lender. However, this policy will only do so if the leaseholder defaults in their ground rent payment. It will not reduce the ground rent or provide any solutions if the landlord has served notice to repossess the property due to non-payment of rent.

Lease extensions

The third option is to extend the lease, thereby reducing the rent to a peppercorn. Although, a statutory lease extension in accordance with the Leasehold Reform, Housing and Urban Development Act 1993 is only available to leaseholders who have been registered as proprietor of the property at HM Land Registry for at least 2 years. The lease can be extended informally by agreement with the landlord, but the landlord will not be governed by the same rules that apply with a statutory lease extension. However, the premium that would be payable in all probability, would be less favourable.

With either a formal or an informal lease extension, a leaseholder will need to pay a premium to the landlord for the additional term of years. In addition, they would also be required to meet the landlord’s legal and surveyors’ fees, on top of their own costs.

If you are interested in selling, but have any concerns relating to your ground rent and/or leasehold property, please contact your local David Andrew Office today on 020-7619-3750 (Archway), 020-7281-2000 (Finsbury Park), 020-7354-9111 (Highbury) or email info@davidandrew.co.uk. We look forward to hearing from you!