What is Ground Rent?
01/05/2023
(Last Updated: 26/09/2023)
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9 min read
Key Takeaways
- Under the Leasehold Reform (Ground Rent) Act 2022, leases extended informally must have peppercorn ground rent for the duration of the extension, once any pre-existing lease has expired.
- Formally extended leases fall to peppercorn rent from completion of the extension
- All new leases must have peppercorn ground rent
- Ground rent is a sum paid if you buy a leasehold property. Its purpose is to pay for the use of the land that your property is located on.
- Details of how much you're meant to be paying should be found in your lease.
- Not paying for it gives the freeholder the right to take legal action against you and even start forfeiture proceedings.
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 sometimes, these increases can cause you to not be able to get a mortgage.
If you've bought a leasehold where 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?
It is important to note that unless your freeholder requests for you to pay this 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).
What is the purpose of ground rent?
Before buying a leasehold property, you should definitely research what is ground rent. Many leaseholders are surprised that they still need to pay for this, even though they have bought their property, and are often left wondering what this covers. It 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. Therefore it is important to have a competent leasehold qualified solicitor to review the lease and advise you of your responsibilities.
What are the new rules on ground rent?
You still have to pay it, although due to the Leasehold Reform (Ground Rent) Act 2022 coming into effect, starting 30th June 2022, this type of rent has been reduced to one peppercorn a year on most leaseholds, which is literally one peppercorn.
Does everyone have to pay ground rent?
It is the leaseholder's obligation under the terms of their lease to pay this sum 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 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 much is typical ground rent?
The actual sum is set out within the lease when the lease is granted. The challenge here is that due to inflation, £50 which might have been agreed upon in 1960 will be worth less in 2022 and as such, freeholders often look to include rent escalation clauses within the lease.
There are, however, some leases that don't include any mechanism for the freeholder to increase the rent, which means the leaseholder could be paying a very small amount of money per year.
Can a freeholder demand an increase?
The freeholder cannot force you to increase it unless it states that they can within the lease.
How much can you charge for ground rent?
Normally within a long-fixed term lease there is an escalation clause; either via a rent review or a pre-agreed increase based on a set period of time.
Rent Review | Fixed Terms Rent Increases |
|---|---|
Rent Review
| Fixed Terms Rent Increases
It is becoming more and more common for freeholders to have specific dates and rent increases within the lease. Your lease can state: |
The above is a very reasonable example of fixed 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 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
In this example, although extreme, within 300 years the amount paid will exceed 1 million pounds.
Does ground rent affect mortgage?
If your 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 rent that doubles after any specific time within your lease.
What happens if you don't pay it?
There could be two reasons why you would not pay; 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 it?
You don't have to pay rent until your freeholder demands you to do so. Since the 28th of February 2005, any demand for 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 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 rent this doesn't mean that you no longer have to pay. Your freeholder can recover unpaid rent going back 6 years and can ask you for the full amount all in one go. The best advice is to put the amount to pay 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 it?
The freeholder can take legal action to seek settlement for unpaid 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 rent for three years or more; or
- owe more than £350 (this can be a combination of 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 rent arrears, then the freeholder can instruct bailiffs to evict you from the leasehold property.
If you are struggling to pay this rent then you can seek further help and guidance from Shelter on their free helpline - 0808 800 4444.
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Written by:
Andrew Boast
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Reviewed by:
Caragh Bailey
Caragh is an excellent writer in her own right as well as an accomplished copy editor for both fiction and non-fiction books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey and mortgage related articles.
