What is ground rent?

In this guide you will learn:


> The difference between leasehold and freehold explained

> How much is ground rent?

> The ground rent scandal

> Tackling rising ground rent costs 

> Do I have to pay ground rent?

> What happens if ground rent is not paid

> Options for buying out ground rent

 

The idea of paying rent if you’ve bought your home may seem a bit odd, but if you own the property as a leaseholder, you will have to pay ground rent to the freeholder.

Put simply, ground rent is a fee charged on leasehold properties as a condition of your lease for the land your home is on. The cost of ground rent will vary between properties. It can also be a fixed cost, staying the same throughout the term of the lease, or it can be escalating. This means it will increase by set amounts as set out in the lease agreement.

The difference between leasehold and freehold explained

Ground rent is only a concern for people who own their homes as a leaseholder. This means you own the property for the length of time set out in the lease (which could have started anywhere between 99 and 999 years). 

It’s a common way of owning flats and maisonettes – so while you own your property in the building, including your bit of inside space and all fixtures and fittings, you do not own a stake in the building or the land it sits on. Some houses are also sold as leasehold properties.

Although most leases are extended before they run out, if they aren’t, ownership returns to the freeholder (the person who owns the building and land outright).

That’s why if you’ve been looking at buying a leasehold property, it’s likely you’ll have been told to check how many years are left on the lease, as it can affect getting a mortgage and the property resale value.

How much is ground rent?

In most cases, ground rent is affordable. You can buy former local authority properties with ground rent as little as £50 a year. There’s also something known as a ‘peppercorn’ rent where historically freeholders would ask for a peppercorn just to enforce the terms of the lease and make it legally binding. The term peppercorn rent can now apply to a very low or nominal amount of ground rent.

Anyone who has owned their property for two or more years can also get a lease extension of 90 years and be entitled to a peppercorn ground rent under the Leasehold Reform, Housing and Urban Development Act 1993. During this negotiation, the amount of ground rent will be up for discussion. 

Of course, a lease extension costs money so there could be some back and forth about both the cost of extending the lease and how much ground rent will be paid each year. A freeholder can’t increase the ground rent as they wish throughout the lease. If it’s an escalating cost, it will increase by a set amount in a set period. If it’s a fixed cost, it won’t change but the freeholder can renegotiate these costs during a request for an extension.

The ground rent scandal

In recent years, there’s been a bit of a problem with rising ground rent costs. It would seem that freeholders – often developers or investors – realised the potential for an additional revenue stream. This is typically a problem for new builds where increasingly high ground rents are becoming common. When you’re paying your mortgage and other household bills, it can have a real impact on your finances.

Costs could already be high, or clauses in leasehold contracts could set out for the ground rent to increase (in some cases, double) over a set period. This could happen numerous times over the length of the lease. The cost of ground rent can quickly reach the thousands with these clauses. In fact, predictions from 2017 suggested that ground rent for some houses could reach £10,000 a year by 2060.

These costs impact homeowners hugely, who can be stuck in contracts with ground rents spiralling out of control.

What’s more, they often struggle to sell their homes. Conveyancing solicitors could warn their clients – the prospective buyers – off buying such leasehold properties and lenders could be reluctant to approve mortgages for homes with such high ground rent (typically above around 0.1% of the value). Sellers often have to slash the cost of the property to encourage a sale.

Unsurprisingly, these homeowners feel frustrated. In many cases, they weren’t aware this would happen. According to trade body NAEA Propertymark:

  • 57% of leasehold house owners didn’t understand what being a leaseholder meant until they had already purchased the property
  • 62% of leasehold homeowners feel like they were mis-sold 
  • 48% of leasehold homeowners were unaware of the escalating ground rent

 Although buyers could have been offered the chance to buy the freehold at the time of purchase, it doesn’t seem like they were made aware of what would happen if they didn’t. Some developers even sold the freeholds on for a profit. By the time homeowners realise their ground rent would increase, the price of buying back the freehold could have jumped hugely from the cost they were originally given (if they were even offered the opportunity to buy it).

All of these frustrations lead to 94% of leasehold homeowners regretting buying a leasehold, according to the Propertymark leasehold report.

Tackling rising ground rent costs

It was clear something had to change. Fortunately, the government pledged to end unfair leasehold practices in December 2017. This commitment included a proposal to ban the sale of long leases on new build properties (but not flats, where there is often a valid legal requirement) and to reduce ground rents on new leases to a peppercorn rent.

Since then, there has been a number of consultations and reviews, and the government is still planning to implement changes to the law to make owning or buying a leasehold a better experience.

But this could be limited relief to those already stuck in leases, so the government and homeowners have increasingly put pressure on developers who sold onerous leases too – particularly those that double more frequently than every 20 years. Many of them signed the public pledge for leaseholders.

Some developers have offered compensation, such as the £130m assistance scheme from Taylor Wimpey. But for many, it’s not enough. They feel misled.


Do I have to pay ground rent?


Before you have to pay ground rent, the freeholder needs to formally ask you following the correct procedure. The request has to be in writing and include all of the following information:

  • Your name
  • The period the demand covers
  • How much you have to pay
  • The name and address of the freeholder
  • The name and address of the managing agent if payment is made to them
  • The date when payment is due

Source: Shelter

If something is missing, the demand could be invalid.

What happens if ground rent is not paid


Once you have a valid formal request, you have to pay ground rent. If you don’t pay, the freeholder can take legal action to ensure you pay. They can apply for a court order to recover the money you owe them.

They can also get a court order for something called forfeiture action. The aim of this is to get possession of the property. But a freeholder can only start this kind of legal proceeding if you haven’t paid for three or more years and you owe £350 or more. This can be for ground rent alone, or a combination of ground rent and other service or administrative charges.

There will be a court hearing for forfeiture action. If you can pay before the hearing, legal action may stop. If you can’t pay before the hearing, the court will usually give you four weeks afterwards to pay what you owe. You will then get something called ‘relief from forfeiture’, the legal action will stop and your lease will continue as before.

If forfeiture or repossession action is taken against you, it’s recommended you get legal advice as soon as possible.

Options for buying the freehold


With the problems of the ground rent scandal, it might feel like leasehold properties aren’t worth the hassle. But many leaseholds are problem-free, with only a small amount of ground rent to pay and plenty of benefits. For example, you don’t have to deal with any upkeep or repairs to communal areas and gardens. Buildings insurance is typically sorted out by the freeholder too. If you’re planning on buying a leasehold property, you should always ask your solicitor to advise you on the amount of ground rent which has to be paid, and whether that amount will rise. 

However, some people will still find themselves wanting to buy the freehold of their property. You can ask the freeholder to sell you the freehold at any time. There are a couple of ways this is possible:

  • If you own a flat, you have to buy a share of the freehold. However, all leaseholders in the building need to come together to buy the freehold. Under the Leasehold Reform, Housing and Urban Development Act 1993, leaseholders can act together and buy the freehold. It’s called collective enfranchisement and the Act sets out all the formal procedures and timescales to be followed. However, leaseholders can also approach the freeholder informally to negotiate a deal.
  • If you own a house, you can also approach the freeholder informally to buy the freehold by agreement. But under the Leasehold Reform Act 1967, you can also buy the freehold of your house. It’s recommended you go the formal route, get the help of an experienced leasehold solicitor, get a professional valuation and make an offer via your solicitor. 

A surveyor will provide you with an indication of how much it should cost to buy the freehold or extend the lease. It can cost thousands of pounds, so it’s a good idea to compare to decide what’s right for you. It’ll also help you determine whether the freeholder is asking for too much.

If you can’t agree on a deal with the freeholder, you can take your claim to the First Tier Tribunal who are responsible for settling leasehold disputes.

Getting help from Manak Solicitors

If you’re having trouble with a lease, would like to request an extension, or to buy the freehold, get in touch with us.  We appreciate law firms can be impersonal or intimidating – we’re here to change that. We can give you friendly advice that’s free from jargon. 

Give us a call on 01689 870 769‬ or get in touch via our email: [email protected]