Most leases granted in the 1980s or before have a low ground rent, which is nominal in comparison to the value of the flat. For example, most ex-local authority flats leased under the Right to Buy scheme have a ground rent of just £10 a year.
However, in leases granted more recently, freeholders have commonly set ground rents at much higher levels. Sometimes they write in wording which increases the ground rent aggressively during the term of the lease.
To combat this, ground rent was outlawed on new leases from June 2022 by the Leasehold Reform (Ground Rent) Act 2022. This legislation means all new leases must have a ground rent of “a peppercorn”. A peppercorn ground rent literally means nothing or £0.
The knock-on effect of this legislation and the bad press for ground rents is that buyers, and their conveyancers, are far more wary than they once were of high ground rents or ground rent escalation clauses. In short, a high ground rent or a ground rent that goes up could stop you selling your flat.
This change has been partly driven by mortgage lenders, who have tightened their lending criteria. Accordingly, a high or rising ground rent can prevent your buyer from getting a mortgage or you from doing a remortgage on your own flat.
Irritatingly, lenders are not very transparent about what ground rents they will or won’t lend on. We’ve been through the lending criteria provided by the main lenders and they’re sparse on detail.
But just because they don’t say that they won’t lend on a certain ground rent, doesn’t mean they will.
Nationwide sum it up by saying just because ground rent is “within policy” doesn’t mean they’ll lend on the property if their valuer thinks it would affect future marketability of the flat:
The valuer may advise the property is not readily marketable and saleable. In this instance we won't consider the property as suitable security.
This article covers the different issues with ground rent and concludes by explaining your options for reducing or removing your ground rent.
Issue 1: Ground rent is more than 0.1% of property value
Generally, if ground rent is more than 0.1% of the value of the property (that’s £200 per year on a £200,000 flat) then lenders will be reluctant to lend on it.
Even if a buyer thinks that they’re happy with this level of ground rent and makes an offer for your flat, the transaction may well fall through later. We find buyers are often put off by their conveyancing solicitor, or the ground rent could cause an issue with their mortgage.
Issue 2: Ground rent rises too frequently
So long as a ground rent starts at a reasonable level, even if the lease has a ground rent review clause that means it doubles every 25 years, it will likely remain at a reasonable level throughout the term – at least once you take into account inflation. If 99-year lease starts with a £50 a year ground rent, it will reach a maximum ground rent of £400.
However, now imagine the same 99-year lease started at £50, but has a 10-year doubling ground rent. It would be a whopping £25,600 by the end of the term.
Generally lenders (Nationwide is a good example) have an issue with ground rent if it rises at intervals of less than 20 years.
Even when a ground rent doesn’t double, but rises by another metric, it can cause an issue if it is reviewed too frequently. Lenders are usually unhappy if ground rent increases at intervals of 10 years or less.
Issue 3: Ground rent rises in a “non-standard” way
Ground rents review clauses commonly fit into one of the following brackets:
- They are fixed, and don’t change throughout the lease term
- They rise, but by intervals and amounts set out in the lease
- They rise by the Retail Price Index
- They rise based on the value of the property – or known as a “Capital Value Linked Ground Rent”
Lenders and solicitors are used to dealing with these types of ground rent, and usually they’re happy to lend on this basis.
Our clients often tell us that they have a problem if the ground rent rises in line with something else – such as a different index or by agreement with the freeholder. Ground rent rises are particularly an issue where they rise with something dynamic – so the lender or buyer can’t tell what the ground rent will be in the future.
Ground rent is more than £250 (or £1,000 in London)
If you have a ground rent which is more than £250 (or £1,000 if you’re in Greater London) then it might have been possible for your lease to be considered an Assured Shorthold Tenancy - although this changed with the Renters' Reform Act. If your lease had been considered an AST, this could have made it easier for your freeholder to repossess your flat.
You can read more detail about the £250 ground rent trap and why it no longer applies.
Although this no longer applies, it may take time for mortgage companies / conveyancers to get the memo - so you might have some convincing to do.
How can I reduce or remove my ground rent?
Often a high ground rent doesn’t start out as a practical problem. If you (or your buyer) is happy to pay it, what’s the issue?
The issue is a theoretical one: a buyer doesn’t want to buy a flat because they’re worried that they might struggle when they come to sell it. A lender doesn’t want to lend on it for the same reason. A conveyancer would rather advise their client not to proceed than risk a negligence claim for bad advice.
When this the theoretical issue stops you selling or remortgaging your flat, then it becomes practical issue.
Fortunately, there are two options for dealing with the issue. The first we don’t recommend, the second is a better option.
Option 1: Deed of Variation
The first option is to ask your freeholder for a “Deed of Variation” which is sometimes also known as Ground Rent Variation. Usually this is to reduce your ground rent, cap it at a certain level or change the way it increases over time.
We don’t recommend simply varying your ground rent: either your freeholder will give you an outright “No” or they’ll want to charge you a large sum of money to change your ground rent.
Even if you reduce your ground rent, unless you reduce it to a peppercorn (i.e. nothing) then you could end up spending thousands without a guarantee you won’t have an issue in the future.
Finally, your freeholder can also use the change in ground rent to slip new charges or restrictions in to your lease – a bit like with an informal lease extension.
Option 2: Statutory Lease Extension
A much better option is to use your legal right to a lease extension, under the Leasehold Reform Housing and Urban Development Act 1993.
In addition to extending your lease by 90 years, this will also set your ground rent at £0 – so you know it can never cause you an issue.
It is worth noting that the cost of your lease extension is dependent on your existing ground rent, and how much it rises over time.
Have specific questions?
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But I don’t need a lease extension! Won’t extending my lease cost me money? How much you pay to buy the extra years is dependent on how many years you currently have. If you’ve already got a long lease, the cost of the extra years will be minimal.
