Leasehold properties: a definitive guide to ground rents

What is ground rent?

If you own a long lease on a property in England and Wales, you will normally have to pay rent to the freeholder or landlord of the property. This is commonly a nominal amount (e.g. £50, £100 p.a.) and will either be fixed, meaning that a certain amount is paid every year for the duration of the term, or escalating, whereby the amount increases by a certain amount (for example, doubling at a specific point in the term of the lease such as every 10 or 25 years).

Ground rent may also be a peppercorn (i.e. nil) if it has been extended under the statutory regime or if the leaseholders in the block or building have collectively enfranchised, acquired their freehold and extended their leases to 999 years. Similar flats can pay different ground rents, depending on the length of the lease remaining, the size of the flat and the starting ground rent as specified in the lease. Meanwhile, ground rent can be varied by voluntary agreement, but leaseholders should always ensure that the proposed terms of the variation are not adverse by taking independent valuation advice.

Why is it so important?

Ground rent has an investment value. This means that investors may focus upon ground rent reversion acquisitions as part of their strategy and look to specifically acquire freeholds with high ground rents and short leases, as these can be financially very lucrative. Ground rent also provides an investor/landlord with a modest and secure income stream.

But as the leaseholder, do you understand your liability under the lease?

Leaseholders do have the ability to negotiate increasing ground rents through voluntary lease extensions. Leases are diminishing assets and the value of the flat is directly linked to the unexpired term of the lease. Ground rent can also be nullified via a statutory lease extension or following completion of a collective enfranchisement but rarely via a voluntary lease extension.

The CML Handbook

The Council of Mortgage Lenders (CML) Handbook sets out the specific requirements for each lender in England & Wales. Conveyancing solicitors will always refer to this handbook during the purchase process to check any specific conditions relating to ground rent in a lease. Paragraph 5.14.9 in particular states:

“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.”

For a lease to satisfy the requirements, the amount of any increased ground rent set out in the lease must be both:

• Fixed or readily established
• Reasonable.

Fixed or readily established ground rent

Rent increases are usually fixed in terms of amount and dates, throughout the term, which creates certainty for the leaseholder. Some leases use a formula or refer to an index such as the Retail Price Index (RPI). This can be simple or complex but must allow the amount of the increased ground rent to be readily established and calculable. Absolute discretion for increasing ground rent is not permitted.

Reasonable increased rent

Whether or not an increase is “reasonable” is a question of judgment. If there is any doubt, a leaseholder’s conveyancer should check with the specific lender and seek specific instructions.

How is ground rent demanded?

The Commonhold and Leasehold Reform Act 2002 provides that a tenant or leaseholder is not liable to pay any rent due unless they receive a formal demand from their landlord. This is limited to six years if not collected, and it must be properly demanded. In order to be valid, the demand must include the following:

• The name of the leaseholder
• The period that the demand covers
• How much the leaseholder has to pay
• The name and address of the freeholder and/or managing agent
• The date on which ground rent is due or fell due.

Naturally, always ensuring that you do not fall into arrears with the ground rent and complying with any other obligations, under your lease, will safeguard you from falling foul of any complaints from your landlord. Ground rents can be onerous provisions for the leaseholder. Always read the lease and if doubt, seek legal advice from an expert lawyer.