How much should ground rent be?

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An update on leasehold reform

The way that ground rent is calculated, reviewed and collected has changed dramatically over the last 100 years. What was once a sum to bind a contract between a freeholder and a leaseholder has now become an investment opportunity for those seeking an assured, fixed return. Unfortunately, purchasing and owning ground rents, which also carries many responsibilities, has been heavily exploited in recent years to the detriment of leaseholders.

This exploitation involved the setting of rapidly escalating ground rent terms within leases, by greedy and some might say callous businesses. As a result, unsuspecting leaseholders are trapped in unmarketable homes and with exorbitant ground rent charges looming. This scandal has led to the subject of ground rent being under intense scrutiny and has justifiably sparked an investigation by the Competition and Markets Authority (CMA).

The CMA announced on 11th June 2019, that it will examine the potential mis-selling of leasehold homes, whether leasehold contract terms are onerous and unfair in relation to ground rent, permission and other charges and ultimately whether there has been a breach of consumer protection laws.

This investigation will undoubtedly be welcomed by those who have been affected, who at the very least deserve an amendment to their inexcusably unfair lease terms. Of course, a successful outcome would also see those who are responsible brought to justice, an end to onerous lease terms and greater protection for home buyers.

Fortunately, the majority of leases do not contain onerous terms and rapidly escalating ground rents. In fact, many older leases stipulate that there is a “peppercorn ground rent”, meaning that the leaseholder is not required to pay a monetary sum. However, in leases where ground rent is payable, the amount can vary enormously.

For example, many owners of new leasehold homes have to pay a ground rent of somewhere between £300 and £700 per annum[i], whilst it is common for ex-local authority flats to have a ground rent of just £10 per annum. However, the location of the property can also impact ground rent fees, with the amount payable typically being significantly higher in cities such as London.

Furthermore, ground rent can be fixed for the lease term or escalating with periodic rent reviews and increases. This is where the people behind the ground rent scandal saw an opportunity and took advantage by setting simply outrageous, doubling ground rents every 5 or 10 years. However, many developers and freeholders are now adopting a much fairer approach to ground rent terms by setting them in line with inflation or the RPI. 

So how much should ground rent be?

Taking all of the above into consideration, it is clear that there is currently no set way to determine how much ground rent should be. However, in light of the ground rent scandal, the government made several proposals for leasehold reform in England in order to protect home owners. One of which is to restrict ground rents in newly established leases of houses and flats to a peppercorn value.[ii]

The government believes that leaseholders should not have to pay “rents at levels which are solely designed to serve the commercial purposes of the developer and any future investors.” However, it is unlikely that this zero-ground rent legislation will “complete its passage until mid-2020 at the earliest”.

In reality though, it’s likely that we will be waiting for this to be implemented for much longer and it is important to remember that this policy will not affect existing leases. Nevertheless, it will certainly put an end to such onerous lease terms and will be highly beneficial for home owners. Action will also be taken to address some significant leasehold loopholes, including unfair possession orders brought about by ground rent.

This refers specifically to leaseholders being classed as assured tenants when their ground rent exceeds £250 per year or £1000 in London. In these instances, leaseholders could be subject to mandatory possession orders if they fail to pay their ground rent and fall into arrears. It cannot be argued that leaseholders do not deserve to lose their homes in these circumstances.

Can a leaseholder refuse to pay ground rent?

Currently, a leaseholder can only refuse to pay their ground rent when it has not been formally demanded in the prescribed format as set out by Section 166 of the Commonhold and Leasehold Reform Act 2002. This means that the freeholder must serve their leaseholders with a Section 166 Ground Rent Demand Notice each time ground rent is due.

To help freeholders comply, Freehold Sale offers a free Section 166 Demand template that can be downloaded directly from our website.

Can a freeholder increase ground rent?

Ground rent can only be increased by the freeholder if it is stated in the lease. The amount by which it can increase, and the frequency of such increase will also be dictated by the lease. The freeholder does not need to provide formal notice of the increase except in cases where the increase is set in line with RPI.

What is RPI ground rent?

RPI ground rent is ground rent that increases in line with increases in the Retail Price Index (RPI). The Retail Price Index measures the average change from month to month in the prices of goods and services purchased by most households in the UK. Most RPI rent reviews have clauses which prevent a reduction in rent in the event of negative inflation.

The freeholder must provide leaseholders with a formal notice of the RPI ground rent increase to provide leaseholders with the chance to dispute the amount. If the annual ground rent has not been calculated correctly or notified to the tenant on or before the review date, then the annual ground rent payable immediately before the review will continue.

Freeholders may be unable to notify leaseholders of the exact increase before the review date because the latest RPI figures may not have been published yet. However, when the freeholder does have the exact ground rent increase in line with RPI, he must notify the leaseholders and at which time they will have to pay the shortfall.

Final thoughts

Ground rent is a complicated and controversial subject that continues to have an immensely negative impact on so many. As there is currently no set way of determining how much ground rent should be, developers are free to set whatever terms they see fit. However, thanks to the ground rent scandal, the setting of onerous terms is now heavily frowned upon and furthermore, many lenders will not offer mortgages on such leases.

We look forward to hearing the outcome of the Competition and Market Authority’s investigation and also seeing new leasehold legislation implemented by the government.

References


[i] Financial Times (2018):  https://www.ft.com/content/27ef07d2-cfb4-11e8-a9f2-7574db66bcd5

[ii] House of Commons Briefing Paper Number 8047 (2019)

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