Selling a Leasehold Property, what you need to know about Ground Rents

Ground rents have become a controversial topic in recent years. You may have seen stories in the press about leasehold properties with onerous ground rents which have made those properties hard to sell. So, if you own a leasehold property and want to move, should you be worried?

‘Ground rents have acquired something of a bad reputation in recent years.’ explains Karen French, a Partner in our Residential Property team. ‘In most cases they do not cause any issues and where issues do arise it is usually possible to resolve these with the right legal advice and planning.’

In this blog, Karen looks at ground rents, considers the latest developments and outlines the options for anyone wishing to sell a leasehold property.

What is ground rent?

If you own a leasehold property, you do not own it outright. Instead, you have a right to occupy the land on which the property is built for a period of years. Ground rent is the money you must pay, usually each year, to the person who owns the land on which the property is built. This person is your landlord and usually also the freeholder of the land.

Historically, ground rents were relatively small sums and did not give rise to issues. This changed in the late 1990s when investors started using ground rents as an additional income stream. As a result, some ground rent provisions became more complex and more onerous. Whereas ground rents used to apply mainly to flats, developers started building and selling houses on a leasehold basis where the houses were subject to ground rents.

Are ground rents a relic of the past?

Many lease owners think it is unfair that they must pay rent for a property they own. They may not have appreciated the full impact of the ground rent provisions in their lease, and onerous ground rent provisions have attracted a lot of criticism.

In response, the Government restricted ground rents on new leases to a nominal amount. Most long leases of residential properties granted on or after 30 June 2022, or 1 April 2023 in the case of a retirement home, should not be subject to ground rent. This is good news if you own a home built after that date. However, if your lease is older, ground rent could still be an issue.

Potential problems with ground rents

Most ground rent provisions will not cause any issues. Unfortunately, ground rent provisions can be complex and sometimes what appears a simple clause can have unintended results. So, it is advisable to choose a conveyancer experienced in this area and to seek their guidance early on.

There are two main problems that can arise. Firstly, a minority of leases have what is called an ‘escalating ground rent’. A lease may typically provide for the ground rent to increase every 25 years and set out the basis for the increase clearly. Some leases, however, contain more frequent review periods and provide for the ground rent to double. At first, the amounts may seem small but the compounding effect over time can be significant. For example, leaseholders at a block in East London had an initial ground rent of £600 per year, which would double every 10 years. This meant it would reach £19,200 on its fifth review.

Secondly, a more common issue is the so-called ‘AST trap’. This occurs where the ground rent exceeds £250, or £1,000 in London. This creates a risk that the lease could be treated as an assured shorthold tenancy (AST), which could allow your landlord to evict you if you do not pay the ground rent. Most leases include provisions for the landlord to take back a lease for non-payment of rent, but you can usually avoid this by paying off the arrears. However, assured shorthold tenancies are treated differently. If a lease is an assured shorthold tenancy, the court has no choice. It must make an order giving the property back to the landlord. This can seem very unfair and is an unintended consequence of the wording of the legislation. The courts have never directly considered the issue with a long lease, so the AST trap remains largely a theoretical risk. However, it is a risk which can create difficulties when you come to sell.

Mortgage lenders and ground rents

Buyers will be directly concerned about the amount of ground rent, but their lenders’ requirements may also constrain them.

Most lenders will not accept a leasehold property with a high and escalating ground rent as security. For example, many will not lend where the ground rent doubles in less than 20 years. Others will not lend where the ground rent is more than one per cent of the property’s market value. Lenders will also be concerned about a lease potentially affected by the AST trap, although most are willing to proceed if their risk is covered by an indemnity policy.

Since many buyers need to borrow to fund their purchase, these restrictions may affect your property’s marketability.

Solutions for ground rent problems

If your lease is affected by a problem ground rent, then your solicitor should be able to suggest potential solutions.

For example, where the AST trap applies, offering to pay the cost of an indemnity policy (usually a couple of hundred pounds) can help keep your sale on track.

With a high or escalating ground rent, the situation can be more challenging, however you do have options.

One possibility is agreeing a deed of variation with your landlord. This could either cap the ground rent or substitute a more acceptable review mechanism. This approach depends on your landlord’s agreement, and you will probably have to pay a premium and their costs. On the plus side, it can be a relatively quick way of remedying the defect in your lease and making it more acceptable to a buyer.

Talking to other leaseholders in your block, who may have experienced the same issue, could give you an indication of your landlord’s receptivity to this approach. If your solicitor or agent has local knowledge, they too may have some insight.

Another option could be to exercise your statutory right to a lease extension. This can be a complicated and time-consuming process, and so it is important to choose a solicitor experienced in this area, who can advise you of its suitability in your circumstances. As well as extending the length of your lease, this will reduce the ground rent to a nominal sum. The ability to rely on this statutory right could also help you negotiate a voluntary variation or extension with your landlord. This can be quicker than going down the statutory route. However, it is essential to get expert independent advice, or you could end up worse off than if you relied on your legal right.

Finally, you could buy the freehold of your property, either individually in the case of a house or collectively if you own a flat. This would mean you no longer have to pay ground rent and this enhances the value of your property. You may have a legal right to do this, or you could come to an arrangement with your landlord. Either way, it can be a lengthy and complicated process.

Further reform may be in the pipeline 

Successive governments have pledged to reform leasehold, and in particular onerous ground rent provisions. Unfortunately, the extent and timetable for reform remains unclear.

For those with leases subject to the AST trap, good news may be on the horizon. The Renters Rights Bill, which is currently in Parliament, could end the AST trap before 2026. However, the progress of any wider reform is less certain. Provisions in the Leasehold and Freehold Reform Act 2024 should change the statutory basis on which you can extend your lease, the intention being to make the process easier. This will also introduce a separate right to vary a long lease to reduce the ground rent payable to a nominal amount. Unfortunately, we do not yet know the detail of these reforms nor their introduction date. Your solicitor will have a good understanding of the up-to-date position and can advise you if they could affect your plans.

How your solicitor can help

Discovering your lease contains a ground rent provision that could make your property harder to sell can be unsettling, but it may not be as big a problem as first feared.

Your solicitor can give you an honest assessment of the situation and suggest ways forward. It is important to involve them early on and to plan ahead. If you need to extend your lease or agree a deed of variation, you should factor in the additional time and cost. For the best outcome, start the process and talk to your solicitor well before you intend to sell.

For further information, please contact Karen French in the Residential Property team on 01205 364615 or KFrench@sillslegal.co.uk.

Sills & Betteridge have offices across Lincolnshire, Yorkshire and the East Midlands.