What is Ground Rent?

03/11/2017
Many leaseholders are surprised that they still need to pay ground rent even though they have bought their property and are often left wondering what this actually covers. Ground rent is a liability set out within the lease payable for the use of the land that the leasehold sits on. It is paid to the freeholder or a superior leaseholder.

The details of your obligations and liabilities to your freeholder with regards to the ground are detailed within your lease and the reviewing of the lease forms part of the conveyancing process. This is why it is important to have a competent leasehold qualified solicitor to review the lease and advise you of your ground rent responsibilities.

Don't get caught out with 'out of control' rent increases

Ground rent increases can often catch out unwary buyers as they can double every few years. Make sure to read on and find out what to look for as some ground rent increases can cause you to not be able to get a mortgage.

If you've bought a leasehold where ground rent doubles or simply want to know the implications and what your options are, you are advised to read our article Ground rent increases every 25 years - What can you do?


In this article we explain:

  • Who pays ground rent?
  • How is ground rent calculated?
  • Does ground rent increase?
  • When do you pay your ground rent?
  • What happens if you don't pay your ground rent?
  • Can you reduce your ground rent?

For the purposes of this article, freeholder and landlord are used to mean the same person.
It is important to note that unless your freeholder requests for your to pay your ground rent using a specific demand notice then you don't need to pay it. However you could be asked to make payment in the future (read on to find out more about this).


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Who pays ground rent?

It is the leaseholders obligation under the terms of their lease to pay ground rent to their freeholder. If there is more than one leaseholder then regardless of whether they own the property as joint tenants or tenants in common, all the leaseholders are liable to pay it.

What to look for in your lease...

"...Yielding and paying therefor the yearly rent of twenty pounds per annum during the first Twenty years of the said term, the yearly rent of Thirty pounds during the next Twenty years of the said term and the yearly rent of Forty pounds during the remainder of the said term such rents to be paid without deduction by equal half yearly payments on the Twenty-fifth day of December and the Twenty-fourth day of June.."


The ground rent you pay is separate to that which the other leaseholders in the flats/conversion pay, however it will be similar in value to yours.

How is ground rent calculated?

The actual sum of the ground rent is set out within the lease when the lease is granted. The challenge here is that due to inflation £50 in 1960 is worth less in 2017 and as such freeholders often look to include rent escalation clauses within the lease to allow them to increase the it to account for inflation.

There are however some leases that don't include any mechanism for the freeholder to increase the ground rent which means the leaseholder could be paying a very small amount of money per year for their ground rent such as £35.

Can a freeholder demand a ground rent increase?

The freeholder cannot force you to increase it unless it states that they can within the lease.

Does ground rent increase?

Normally within a long fixed term lease there is a ground rent escalation clause; either via a rent review or a pre-agreed increase based on a set period of time.

Rent Review

A rent review clause usually operates in the following way:

  • the freeholder serves notice on the tenant requesting a higher ground rent and putting forward what the new rent should be. The lease should set out how long before the new rent becomes payable should the notice be served (for example, 6 months);
  • the leaseholder can either agree to the new rent, or put forward a counter proposal;
  • if the freeholder and the leaseholder cannot agree then the matter should be passed to an arbitrator. It most leases it states that the arbitrator be appointed by the president of the Royal Institution of Chartered Surveyors (RICS).

Fixed terms rent increases

It is becoming more and more common for freeholders to have specific dates and rent increases within the lease. An example of this was in the above 'What to look for in your lease' where it states that:

  • £20 per year for the first 20 years;
  • £30 per year for the next 20 years; and then
  • £40 per year until the end of the lease term.

The above is a very reasonable example of fixed ground rent increases, however newer leases have a new style of clause included in them which look like this:

What to look for in your lease...

"...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..."

In the example above, the ground rent doubles every 25 years which looks like this:

  • £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, although extreme, within 300 years the ground rent exceeds 1 million pounds.

Ground rent increases for 15 years or less

If your ground rent doubles after 15 years or less then you may not be able to register a mortgage over the title as the mortgage lender will not accept this. You should speak to your mortgage lender about any ground rent that doubles after any specific time within your lease.

When do you pay your ground rent?

Unless it is agreed otherwise, ground rent is payable 'in arrears' normally at the end of the year or bi-annually (some freeholders now demand rent quarterly). However, freeholder will always almost insist on payment in advance.

Ground rent didn't always used to be paid in money!

Ground rent payments didn't always use to be paid with money, instead it could be in kind, such as 'three hundred bottles of champagne' (see Law of Property Act 1925). With this said, the ground rent agreed upon at the start of a lease is almost always takes the form of a regular money payment.

What happens if you don't pay your ground rent?

There could be two reasons why you would not pay your ground rent; either the freeholder hasn't demanded for it to be paid or you can't afford to pay the rent.

What should you do if your freeholder doesn't demand the ground rent?

You don't have to pay ground rent until your freeholder demands you to do so. Since the 28th February 2005 any demand for ground rent by a freeholder, or their managing agent, has to be made using a specific notice as set out in Section 166 of the Commonhold & Leasehold Reform Act 2002. The notice includes the:

  • leaseholder's name;
  • period that the demand covers;
  • amount of ground rent due for the period;
  • name and address of the freeholder;
  • name and address of the managing agent if payment is paid to them; and
  • date when payment is due.;


If there is a delay in serving you with a notice to pay ground rent this doesn't mean that you no longer have to pay. Your freeholder can recover unpaid ground rent going back 6 years and can ask you for the full amount all in one go. The best advice is to put the ground rent into a savings account so it is available to pay to the freeholder once they serve you with the correctly completed and served notice.

What happens if you can't afford to pay your ground rent?

The freeholder can take legal action in order to seek settlement for unpaid ground rent. The two routes for legal action to:

  • recover the debt (and potentially court costs and penalties included within the lease)
  • take possession of the leasehold property (known as forfeiture)

The freeholder can start forfeiture proceedings if you:

  • have been in arrears with ground rent for three years or more; or
  • owe more than £350 (this can be a combination of ground rent, service charges or administration fees)

Before the court hearing, leaseholders are given four weeks to settle the amount due. If this is paid then the legal action stops immediately and this is called 'relief from forfeiture'.

Once the court ordered has been issued, if you fail to pay the ground rent arrears then the freeholder can instruct bailiffs to evict you from the leasehold property.

If you are struggling to pay your ground rent then you can seek further help and guidance from Shelter on their free helpline - 0808 800 4444.

Can you reduce your ground rent?

There are two ways to reduce your ground rent; extend your lease under the formal process or collective enfranchisement. Using the first option, eligible leaseholders can exercise their legal right to extend their lease by 90 years on top of their current lease term and reduce their ground rent to a peppercorn ground rent - this is often thought of as 'buying out ground rent'.

Is ground rent different to service charges?

Yes, ground rent, as shown above, relates to the rent of the ground your leasehold sits on, whereas service charges are costs the freeholder incurs to maintain the freehold and the communal areas. Examples of service charge costs are:

  • Lift maintenance;
  • Garden maintenance;
  • Lights;
  • Security; and
  • Cleaning.


Related News Articles

 
What are Leasehold Service Charges?
08/11/2017
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