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