Ground rents have been something of a hot topic over the last few years. You may have seen articles in the press concerning ground rents and how in some cases mortgage lenders will not lend on properties with unreasonable or doubling ground rents.
The situation is a little more complex than that and the main focus of the problem was initially ground rents on long leasehold houses. The issue there arises from the calculation of the cost if a long leaseholder of a house wanted to buy the freehold from the land owner. There have been cases where the cost to buy the freehold of a house could be tens of thousands of pounds.
In the cases of flats, ground rents have always been around and it was only in the last few years that lenders began to think about whether a rising ground rent could affect the value of the property. At that stage, the various lenders began to issue their requirements for what they would, and would not, accept as good security for a loan.
Ground rent increases are usually either fixed, as in they may double every 10, 15, 20 or 25 years, or they may increase periodically calculated on a formula linked to the RPI.
The majority of lenders subscribe to the UK Mortgage Finance Lenders Handbook and this is the guidance that Solicitors must refer to in order to find out the requirements of any particular lender.
The general guidance given in the Handbook is :
“We have no objection to a lease which contains provision for a periodic increase of the ground rent provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable. If you consider any increase in the ground rent may materially affect the value of the property, you must report this to us”
Individual lenders often (but not always) have their own very specific requirements as to how frequently ground rents may be reviewed and whether there should be any financial caps on these increases.
There is another more recent concern that has arisen in relation to ground rents and this concerns the Freeholder or Landlord’s ability to seek possession (or forfeit) of a lease for non-payment of ground rent. It has always been the case that a Landlord could seek to forfeit a Lease if the tenant (Flat owner) did not pay ground rent or service charge. However, traditionally the tenant is able to apply for relief from forfeiture and the Court has the discretion to grant relief (usually when the tenant pays the outstanding amounts).
The current live issue is that once an annual ground rent of a long lease exceeds £1,000.00 in London (or £250.00 outside London) the Lease technically becomes an Assured Tenancy and, under the Housing Act 1988, the Landlord would potentially have the right to forfeit the Lease under that Act without the tenant having the ability to apply for relief.
As you can imagine, this is not ideal for purchasers and is considered as completely unacceptable by lenders. There are, however, some mechanisms including mortgagee protection clauses and indemnity insurance which can be brought into play in order to make a lease acceptable to a Lender.
Let’s end with the good news! The Leasehold Reform (Ground Rent) Act 2022 has now been given Royal Assent and will come into force on or before 8th August 2022. This Act means that any new long leases (more than 21 years) granted after that date cannot be for more than a “peppercorn” rent – which is effectively nil. Whilst it does not retrospectively bring ground rents in existing long leases down to a peppercorn you should be aware that many alterations to existing leases (including lease extensions) shall be deemed to create a new lease and the ground rent would be automatically adjusted to a peppercorn rent.