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Ground Rent Problems

What is ground rent?

Ground rent is a sum of money payable by the Flat Owner to the freeholder under the terms of the lease.

Ground rent is payable in addition to service charges (a sum of money the Landlord claims annually to cover his expenses and costs in managing and maintaining the building).

Most leases provide for the ground rent to be a fixed sum.  In many cases it is a small, or nominal amount, but in cases where it is not, the Flat Owner can encounter some significant problems.

The Demand

Where the lease is a ‘Long Lease’ ( a lease for a term of 21 years or longer, so this applies to virtually all flat leases), the provisions of section 166 of The Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) require the Landlord to use the prescribed form to demand ground rent payments.

The levels of Ground rent

Leases granted in the 1960’s, 70’s and 80’s typically contain fairly nominal ground rent figures; such as £50 per annum doubling ever 25 years. It is only recently that we have seen more ‘modern’ ground rents of, say, £200 doubling every 10 years.

Let’s take an example;  the Landlord made a private offer of a new lease , for an additional 90 years on top of the unexpired term with an initial ground rent of £250.00 per annum increasing by 20% on every fifth anniversary.  The new lease would have had 149 years left to run and the effect was to cause the ground rent to rise so that in the last four years of the term the ground rent would be an eye-watering £49,453.75 per year!

This was a catastrophically bad bargain for the Flat Owner for many reasons;

  1. The primary aim of a lease extension is to preserve and increase the value of the flat. A lease is a depreciating asset. Having this level of ground rent would make the flat instantly unattractive to any future buyer.   Any solicitor acting for a Flat Owner must be governed by the provisions of the UK Finance Mortgage Lenders Handbook.  Paragraph 5.14.9 provides that “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”.

    The ground rent proposed would have materially affected the value of the property. 

  2. Should the current Flat Owner, or any buyer wish to exercise their statutory rights to a lease extension in the future then the freeholder is entitled to be compensated for future loss of ground rent, as under a statutory lease extension the ground rent is reduced to nil. The amount needed to compensate the freeholder under the above example would be eye-watering and likely to be prohibitive.  The Flat Owner’s only other option would be to allow the lease to run down to, say, 10 or so years left to avoid having to pay compensation for all those years of astronomically high ground rent but would then be in a position of having such a high marriage value that essentially the premium would be akin to buying a whole new flat.  A third option would be to allow the lease to expire, meaning that the Landlord would get his flat back and the Flat Owner would be left with nothing.
  3. Should the Flat Owners in the block wish to join together to enfranchise (i.e. force the Landlord to sell the freehold of the block) then, for the reasons above,  the ground rent would be prohibitive to the process. 

So what should a Flat Owner do if faced with a private offer with rising ground rent?

Any Flat Owner with a short lease is advised to extend it as soon as possible, and most certainly before it drops below 80 years. Whilst a private extension often results in a lower premium and lower associated costs this may well be a false economy.  Private lease extension terms are offered by a Landlord on a ‘take it or leave it’ basis but to accept these terms may well just be delaying an even bigger expenditure as many buyers are now insisting on a Deed of Variation so that the Flat Owner essentially buys himself out of the unattractive ground rent clause and the buyer takes free from it. 

Conclusion

Any Flat Owner faced with a private offer containing high ground rent provisions would be well advised to reject the terms and embark on the statutory process. 

Please contact our specialist Samantha Marsh, Leasehold Enfranchisement team, today for legal advice on 01329 282841 or at Samantha.Marsh@glanvilles.co.uk.