Ground rent increases every 25 years - What can you do?

26/04/2018
Ground rent increases used to be very small. In the 1950s through to the 1970s you would most likely have a lease that had annual ground rent from £10 to £50 and if there was a ground rent increase within the lease it would be as low as £10 or £25 after 30 or 40 years (a lot of money at the time, however not so much nowadays).

Nowadays freeholders provide leases that have considerably greater ground rent increases built in. An example of this is where ground rent increases every 25 years and is doubled each time. This type of doubling ground rent clause is normally found in long leases (200 to 999 years). The issue with a lease which includes a doubling of ground rent every time it increases is it could:

  • be costly to you as the prices increase (although as it gets more expensive this won't be during your life time);
  • stop a future buyer from getting a mortgage as mortgage lenders do not like doubling ground rent clauses (it might even prevent the current owner from remortgaging);
  • cause an issue on sale as the buyer doesn't want to buy a property with ground rent that doubles; or
  • reduce the property's value (the ground rent liability makes the property less valuable).

In this article we look at:


Why are there ground rent increases?

The reason ground rent increases is because £1 today is worth a lot less than £1 in 50 years' time and considering leases are granted for 125 years or more, the freeholder wants to ensure they are paid current market rate for the ground rent.


If you want to know more about why ground rent is payable, how it is calculated and what to do when you haven't ever paid any ground rent - then read our article here - What is Ground Rent?

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How do you check when your ground rent increases?

Your lease which was drafted by the original freeholder of the property sets out your ground rent liability and any increases. An example of this wording is as follows:

"...means the annual sum of £250.00 such sum to double on every twenty fifth anniversary from the Commencement Date"- "...YIELDING AND PAYING to the Landlord therefore during the Term the Rent half-yearly in advance on the First day of January and the First day of July in each year without any deduction..."


How doubling ground rent works - an example

  • £250 for the first 25 years
  • £500 for the next 25 years
  • £1,000 for the next 25 years
  • £2,000 for the next 25 years
  • £4,000 for the next 25 years
  • £8,000 for the next 25 years
  • £16,000 for the next 25 years
  • £32,000 for the next 25 years
  • £64,000 for the next 25 years
  • £128,000 for the next 25 years
  • £256,000 for the next 25 years
  • £512,000 for the next 25 years
  • £1,024,000 for the next 25 years
  • And so on...

In this example within 300 years the ground rent exceeds 1 million pounds. As a buyer you should always check to see when the lease was initially granted because you may well be half way through the first ground rent period.

Formally extend your lease and get peppercorn ground rent

...however informally extend your lease and your freeholder may look to include a ground rent doubling clause

If you've read our article on how to extend a short lease, then you'll know that when you extend your lease you can either extend it using the formal route, where you add an additional 90 years to your current lease term and reduce your ground rent to nil ("peppercorn"), or informally where you agree a price and number of years with the freeholder and you agree the terms of the new lease - which almost always includes a review of the ground rent and when it increases.

Freeholders often use informal lease extensions to include the new ground rent escalation clause so watch out for this. The freeholder will put forward a low premium to extend the lease of the property, however they will do so in an informal offer and then include a new ground rent clause so that ground rent doubles every 25 years and as such they will recoup on the lower lease premium with more ground rent over time.


What can you do if your lease has got doubling ground rent?

    1
    The seller can vary the lease with the freeholder - this is an option, although the seller will have to pay for theirs and the freeholder's solicitor's legal fees (£500 + VAT on both sides). The problem here is that the freeholder drafted the clause within the lease and they are under no obligation to vary the ground rent to something the buyer would agree to.
    2
    The seller can purchase the freehold - the process is called collective enfranchisement and requires 2 or more of the leaseholders to buy the freehold from the freeholder. There is a premium to pay for the freehold and the leaseholders are liable for the valuation and solicitor costs for both themselves and the freeholder. Once the seller owns the freehold (share of freehold) they can then vary their own lease and remove the ground rent clause. This is a costly and very time consuming route making it unlikely that you'd take this option.
    3
    The buyer can continue on with the purchase with no changes - subject to the mortgage lender's consent, the purchase can still proceed as long as the buyer is happy with the ground rent. Buyers will be put off by this issue as the solicitor acting for the buyer will inform them of the risk involved and the challenges the buyer may subsequently face when they try and sell the property in turn.
    4
    The seller can find a buyer who doesn't care - this is a high risk with potential issues in the future, however when a buyer falls in love with a property they may be willing to take the risk of an issue on the sale, especially if the lease is so new and there are many years before the first ground rent increase. Sadly though, finding a buyer who will take on the risk is easier said than done and many will look to negotiate on the asking price as they don't want to take on the risk and still pay full market value.

How can we help you?

We have specialists conveyancing solicitors to support you with either varying your lease or purchasing your freehold. In both cases the process can take some time, however we will provide a fixed quote for the handling of the legal work for you. Please get in contact by calling 0207 112 5388 or email help@samconveyancing.co.uk.
 
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