Troubling ground rents in the leasehold market
Emily Neale discusses the ‘ground-rent scandal’ and the government’s proposals to tackle the issue.
Ground rent provisions in both existing and new leases have long been headaches for both solicitors and leaseholders looking to sell their property. Many leaseholders are coming to sell their properties only to discover that they have been caught up in the so called ‘leasehold trap’. The government has raised its concerns that ground rents have risen so drastically and this has impacted on the saleability of some properties. As a result, the government has revealed its intention to tackle what it calls “unfair practices” in the current leasehold market.
Ground rent reservations in leases usually take one of two forms; fixed or increasing and it is the increasing ground rent provisions which are causing issue. In these scenarios, the lease provides for the ground rent to increase by a fixed sum over a set period of years, for example for the rent to double every 10 years. Whilst the ground rent to the property may appear to be low initially, when the increased ground rent is calculated over the course of the term of the lease, the leasehold may find that the ground rent may later cost thousands of pounds as the term of the lease matures. An example of this type of ground rent increase can be found in the table below in respect of a 99-year lease with an initial ground rent of £10 which doubles every 10 years:
|Ground rent figure
This kind of provision causes several problems, but perhaps most worryingly the leaseholder may find themselves trapped with an ever-increasing ground rent which also increases the risk of forfeiture of the lease, meaning that the landlord can take the lease away from the tenant without paying any compensation. This is because, should the leaseholder fall behind in making their ground rent payments, most if not all leases will provide for the lease to be forfeited should the ground rent be unpaid. A further risk to the leaseholder is that they may find their property to be unmortgageable due to the rent provisions as more and more lenders are becoming aware to the issue of increasing ground rent. The culmination of these risks means that many leaseholders are now finding themselves stuck and unable to find a buyer for their properties.
The government has made proposals to tackle some of these issues, but there are limits to this. The government had initially said that its plans were to introduce legislation which will cap ground rents on new build properties to a peppercorn, i.e. nil. The government has also stated that it wants to see the compensation schemes introduced by developers being extended to all those with onerous ground rents and for this to also include second-hand purchasers. However, the latest comment by the government has said that it plans to cap ground rent under new leases at £10. There is currently an ongoing consultation on the proposed reforms to which we await the government’s response.