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Ground rent: Don’t get stung by the hidden costs of leaseholds

Lisa Coubrough, conveyancing specialist at Setfords gives homebuyers, and owners advice on how to avoid the hidden costs associated with some leaseholds, and why understanding your leasehold inside-out is so important.

What is Ground Rent?

Leases are typically granted for a term of 99 or 125 years with provision for an annual payment being made by the leaseholder to the landlord. This is known as ‘ground rent’. Ground rent can be fixed, i.e. at £50 per year for the term of the lease, or it can increase over the duration of the lease. For example, a lease could provide for a yearly ground rent of £150 doubling every five years –  this would mean that in 20 years the ground rent would be £2,400 per annum!

Why do some leases contain higher ground rent provisions than others?

When properties are first built by a developer they will be the landlord that grants the lease to the leaseholder. It has become increasingly common for developers to include high ground rents in leases because the income it generates can be vast (especially on larger developments). The developer can then sell the freehold to a buyer at a higher value than those with lower ground rents once the development has completed.

What do high ground rents mean for the leaseholder?

There are a number of issues for leaseholders that have leases with high ground rents:

  • It could render the property unmortgageable, and therefore unsaleable. Many of the biggest lenders are refusing to provide finance on leasehold properties where the ground rents increase to unreasonably high levels. If buyers cannot obtain a mortgage to assist them on the purchase of such a property, then the leaseholder is likely to find that they will be unable to sell their property.
  • If the ground rent in the lease rises to above £250 per annum, (or £1,000 per annum for properties in Greater London), then there is a risk that the lease will be considered an Assured Tenancy (Assured Tenancies are commonly short-term tenancies). The consequence of this is that if ground rent is more than three months overdue, the courts have to terminate the lease and give possession back to the landlord. This is another reason why banks are refusing to lend where long leases have unreasonably high ground rents – there is a higher risk that non-payment could lead to the lease being handed back to the landlord.

The rules are different for buy-to-let properties and there are various factors that can affect the consequences of non-payment of ground rent. This is where an experienced conveyancer can advise on your particular circumstances.

What you can do?

Firstly, review the ground rent provisions in your lease. We can assist you by reviewing and advising whether the terms on ground rent would be considered to be onerous

If your ground rent appears to be unreasonably high then there may be options available to you, such as:

  • Approaching your landlord and seeing whether they would agree to reduce the amount of ground rent payable under your lease. Your landlord may be willing to agree to such a variation on reasonable terms, however some landlords may wish to charge you a premium for varying the original lease.
  • In the case of leasehold flats you could consider extending your lease under the statutory procedure. As long as you qualify, the landlord must extend the term by an additional 90 years and reduce the ground rent to what is referred to as ‘a peppercorn’ (which in practice means no ground rent will be demanded). You would need to obtain a valuation from an experienced surveyor as there would be a premium payable for the lease extension.
  • In the case of leasehold houses you could consider purchasing your freehold. As above, you could approach your landlord and enquire whether you can buy the freehold and negotiate terms and whether the landlord requires any payment for the freehold. Otherwise, leaseholders of houses have a right, if they qualify, to purchase the freehold under a statutory procedure. Again, you would need to obtain a valuation from an experienced surveyor, as there would be a premium payable for the purchase.

What is the Government doing to remedy this situation? 

Late last year the government introduced proposals as to how it will seek to deal with unreasonably high ground rents. It is therefore possible that legislation may be introduced restricting a landlord’s entitlement to collect or demand ground rent. At the present time, details of this legislation have not been put forward and  it is not clear whether any legislation would apply retrospectively to existing leases with unreasonably high ground rents. There is also a landmark case, which on the 16 January 2018 went before the Court of Appeal, concerning how the cost of lease extensions and buying a freehold are calculated. The decision could cut the price of lease extensions or buying your freehold (at the time of writing the decision is still awaited).

Knowledge is power

Lease terms can be complicated, and can potentially cost home owners thousands of pounds, not to mention stress and anxiety. Before purchasing a leasehold you should always speak with an experienced conveyancer to make sure you fully understand your commitments under the lease. If you have already purchased a leasehold and are in doubt over its terms it is in your interests to have the terms reviewed by an expert so you can prepare for any potential rise under the terms.

If you are concerned about the ground rent reserved in your lease, contact Lisa Coubrough.