Rip-off ground rent, extortionate ground rent, high ground rent. No matter how you describe it; if you’re the owner of a leasehold house or flat then it will be an unwanted addition to the cost of ownership.
What is ground rent?
In the past the payment of rent was considered to be necessary for a lease to be valid. Even though it has since been established that it is not necessary, most modern leases still reserve a ground rent to the landlord. It has therefore simply become a means for landlords, who are likely to have already demanded a substantial premium from the leaseholder for the grant of their lease, to secure an ongoing income.
Ground rent versus service charge
Ground rent is different from service charges, which are contributions towards the maintenance and management of the building, as the ground rent is a profit.
What is an onerous ground rent?
There is no universal definition of the term, but an onerous ground rent is essentially one that is large enough to affect the value of the property.
For example, a ground rent of £100 a year might not be a cause for concern, but if that ground rent doubled every 5 years then in just 20 years the rent would have increased to £1,600 p.a.
When the property was sold, the buyer would be looking at paying £3,200 a year after a further 5 years. Even accounting for inflation, a buyer would no doubt be put off by such a high yearly sum unless the property was otherwise sold at a discount.
Is there any law to protect flat owners?
There are currently no rules that govern ground rent provisions in leases. This allows flexibility as in some circumstances a leaseholder might consciously agree for a large ground rent to be payable, for example where the lease is granted at a lower premium.
I want to reduce my ground rent; what can I do?
Leasehold Flat owners
Provided a flat owner has owned their flat for at least two years, they can serve a formal notice on their landlord claiming a new lease that is 90 years longer than their existing lease and reducing ground rent to a ‘peppercorn’. A peppercorn is a nominal ground rent that is unlikely to ever be demanded, so this really equates to nil ground rent.
The statutory rules that govern this right are set out in the Leasehold Reform Housing and Urban Development Act 1993. This legislation also entitles leaseholder flat owners to make a collective claim to buy the freehold of the building containing their flats.
Note that the leaseholder has to pay the landlord a premium to extend their lease or buy the freehold and that the amount they pay will be affected by the amount of ground rent payable under their lease. In general the higher the existing ground rent the more the landlord is entitled to demand by way of a premium.
Leasehold House owners
Provided a leasehold house owner has owned their house for at least two years they are likely to qualify to buy the freehold of the house under the Leasehold Reform Act 1967. As with leasehold flats, the leaseholder would have to pay a premium to the landlord in return for the freehold, and this premium will be affected by the amount of ground rent payable under the lease.
Are there any other options?
It may be worth trying to agree a deal with the landlord on a voluntary basis whereby the ground rent provisions in the lease are varied. However, if the leaseholder has not exercised their statutory rights as set out above, they may reject any offer that is not to their advantage.
In some limited cases it may be that a mistake was made when the lease was granted, in which case it may be possible for a court to rectify the lease. This is likely to be the exception rather than the rule though and the leaseholder would have to have evidence that the parties to the lease had intended to agree different terms.
What if I wasn’t told about onerous ground rent?
It is a conveyancing solicitor’s job to check the ground rent provisions in a lease when reporting to you prior to exchange of contracts. If you have discovered that you have bought a lease containing onerous ground rent provisions, but this was not pointed out to you at the time you purchased the property, your solicitor may have been negligent in failing to notify you. In this case you may wish to pursue a professional negligence claim.