What is ground rent?
- If you own a long lease on a property in England and Wales you will normally have to pay rent to the freeholder or landlord of the property.
- Commonly a nominal amount (e.g. £50, £100 p.a.).
- The ground rent will either be fixed meaning that a certain amount is paid every year for the duration of the term, or escalating whereby the amount increases by a certain amount throughout the term (e.g. doubling, increasing by a specified amount at a specific point in the term of the lease such as every 10 or 25 years).
- Ground rent may also be a peppercorn (i.e. nil) if it has been extended under the statutory regime or if the leaseholders in the block or building have collectively enfranchised, acquired their freehold and extended their leases to 999 years.
- Similar flats can pay different ground rents depending on the length of the lease remaining, size of the flat and the starting ground rent as specified in the lease.
- Ground rent can be varied by voluntary agreement but leaseholders should always ensure that the proposed terms of the variation are not adverse by taking independent valuation advice.
The CML Handbook
The Council of Mortgage Lenders (CML) Handbook sets out the specific requirements for each lender in England & Wales. Conveyancing solicitors will always refer to this handbook during the purchase process to check any specific conditions relating to ground rent in a lease.
Paragraph 5.14.9 states:
“We have no objection to a lease which contains provision for a periodic increase of the ground rent provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable. If you consider any increase in the ground rent may materially affect the value of the property, you must report this to us.”
For a lease to satisfy the requirements, the amount of any increased ground rent set out in the lease must be both:
- Fixed or readily established
- Reasonable
Fixed Or Readily Established Ground Rent
Rent increases are usually fixed which creates certainty for the leaseholder – fixed amount and dates throughout the term.
Some leases use a formula or refer to an index (e.g. Retail Price Index (RPI)) – can be simple or complex but must allow the amount of the increased ground rent to be readily established and calculable.
Absolute discretion for increasing ground rent is not permitted.
Reasonable Increased Rent
Whether or not an increase is “reasonable” is a question of judgment.
If there is any doubt, a leaseholder’s conveyancer should check with the specific lender and seek specific instructions.
How Is Ground Rent Demanded?
S.166(1) CLRA 2002 (Commonhold and Leasehold Reform Act) provides that a tenant/leaseholder is not liable to pay any rent due unless they receive a formal demand from their landlord. Limited to 6 years if not collected but must be properly demanded.
The demand must include the following to be valid:
The name of the leaseholder;
- The period that the demand covers;
- How much the leaseholder has to pay;
- The name and address of the freeholder and/or Managing Agent; and
- The date on which ground rent is due or fell due.
Why is Ground Rent Important?
Ground rent has an investment value – investors may focus upon ground rent reversion acquisitions as part of their strategy and look to specifically acquire freeholds with high ground rents and short leases and these can be financially very lucrative.
Provides an investor/landlord with a modest and secure income stream but does the leaseholder understand their liability under the lease?
Can be onerous provisions for the leaseholder – read the lease and if in doubt seek professional legal advice.
Leaseholders do have the ability to negotiate increasing ground rents through voluntary lease extensions. Remember that leases are diminishing assets and the value of the flat is directly linked to the unexpired term of the lease. Be aware that ground rent can be nullified via a statutory lease extension or post completion of a collective enfranchisement but rarely via a voluntary lease extension.
Katie Cohen is consultant solicitor with Keystone Law
