Ground Rent issues in Long Leases
01 Dec 2021
Prospective flat buyers and mortgage lenders will be more concerned than previously about the amount of ground rent payable and the frequency and amount of any ground rent increases.
Mortgage lenders’ criteria for rent clauses in residential leases have changed in recent years in view of Section 127 of the Housing Act 1980, which provides that if ground rent payable under a Lease exceeds £1,000.00 per annum in Greater London (£400.00 per annum elsewhere), the Lease becomes an Assured Tenancy under the Housing Act 1980. Failure to pay ground rent under an Assured Tenancy entitles the Landlord to repossess the flat under a Court Order and forfeit the Lease without giving mortgage lenders the opportunity to pay the rent to protect their security.
On a statutory lease extension under the Leasehold Reform, Housing and Urban Development Act 1993, the ground rent will drop to £0 (“a peppercorn”) but the flatowner must compensate the Landlord for the loss of ground rent for the rest of the lease term. e.g Assuming a lease originally for 125 years with 85 years remaining, starting rent of £100 per annum, the total remaining ground rent is:
- ground rent fixed £100 per annum – £8,500.
- ground rent rises by £100 every 25 years- £32,000.
- ground rent doubles every 25 years- £72,000.
These figures have to be capitalised; ie. The surveyors will work out how much, allowing for estimated interest rates, you would have to pay a Landlord now so that at the end of the lease term, that fund would add up to the above totals. However, you can see how an escalating ground rent can vastly increase the amount of ground rent for which the landlord must be compensated.
If your landlord offers you a non-statutory lease extension, retaining the ground rent or increasing it at intervals, you or your surveyor should do the Maths! By accepting such a lease, you may be storing up problems for the future in (a) making the lease into an Assured Tenancy, although some Landlords are now agreeing to include “mortgagee protection” clauses in lease extension deeds which restrict the Landlord’s right to forfeit a lease for non-payment of ground rent; and/or (b) increasing the ground rent fund which has to be bought on a future statutory lease extension.
The Government announced in January that it intended to introduce legislation for Leasehold Reform to simplify and reduce the cost of extending leases. There is no assurance as to when, or to what extent, such reform will become law.
If your lease has over 80 years to run, you may wish to defer extending the lease to see what happens with the proposals for Law Reform. If you cannot afford to wait, then because of the problems mentioned above, we recommend that flatowners should claim a statutory (rather than voluntary) lease extension, which gets rid of both these problems at the same time.