When purchasing a leasehold property in the United Kingdom, it is essential to understand what ground rent is and how it affects your ownership rights. Ground rent is a fee charged to leaseholders by the freeholder (the person who owns the building and land outright) as a condition of the lease for the land on which the property is built.
This easy to understand Strangford Management guide will provide an in-depth explanation for you, its history, how it is calculated, and the recent changes in the UK legislation.
1. The Leasehold System and Ground Rent
A Brief History of Leasehold and Ground Rent
The concept of ground rent dates back to the time of William The Conqueror, who claimed that all land in England and Wales was actually under his ownership. This led to the creation of a system where wealthy landowning Lords were granted estates and could charge individuals living on that land a fee for their occupation – an early form of lease.
Leasehold vs. Freehold
Ground rent is only applicable to leasehold properties, meaning you own the property for a fixed period (usually between 99 and 999 years) as stated in the lease agreement. In contrast, freehold properties grant the owner complete ownership of the land and the building on it without any time restrictions.
Leasehold properties typically include flats and maisonettes, where the leaseholder owns the interior space and fixtures but does not have a stake in the building or land it sits on. Some houses may also be sold as leasehold properties.
2. How Ground Rent is Calculated
Fixed vs. Escalating Ground Rent
Ground rent can either be a fixed or escalating amount. Fixed amounts remain unchanged throughout the term of the lease, while escalating ground rent increases at specified intervals as stated in the lease agreement.
For example, a 99-year lease may have an initial rate set at £50 per year for the first 33 years, increasing to £100 per year for the next 33 years, and finally £150 per year for the remaining 33 years.
Calculating Ground Rent
There is no standard method for determining amounts, and it varies from lease to lease. Some modern flats may have costs ranging from £200 to £500 per year, while ex-local authority flats may be as low as £10 per year.
3. Payment and Conditions
Leaseholders are not required to pay ground rent unless the freeholder has formally requested it. The demand must be in writing and include the following information:
- The name of the lessee
- The period that the demand covers
- The amount the lessee has to pay
- The name and address of the freeholder (and managing agent, if applicable)
- The due date for ground rent payment
- Ground Rent Arrears and Legal Consequences
If a leaseholder fails to pay the fee when legally demanded, the landlord can take them to court to recover the debt. In extreme cases, the landlord could commence forfeiture proceedings to recover possession of the property. However, this can only occur if the outstanding amount is £350 or more, and the leaseholder has been in arrears for three years or more.
4. Lease Extensions
Under the Leasehold Reform Act 1993 leaseholders have the right to extend their lease by 90 years at a peppercorn cost, effectively eliminating the need to pay the freeholder. This process, however, incurs costs for the lease extension itself and may involve negotiations with the freeholder.
5. The Ground Rent Scandal
In recent years, the UK has witnessed a ground rent scandal, where freeholders, including developers and investors, have imposed escalating rents on new build properties. These escalating charges can reach thousands of pounds per year, with no clear service provided in return, creating a significant financial burden for leaseholders.
The scandal has led to difficulties for homeowners attempting to sell their properties, as conveyancing solicitors may advise prospective buyers against purchasing leasehold properties with high charges. Mortgage lenders may also be reluctant to approve mortgages for properties with where rent exceeds 0.1% of the property value.
6. Government Reforms
In response to the scandal, the UK government has introduced several reforms aimed at creating a fairer housing system. These reforms include:
- Banning ground rent charges on most new residential leases from 30 June 2022
- A new right for leaseholders to extend their leases to 990 years at zero rent
- An online calculator to help leaseholders determine the cost of buying their freehold or extending their lease
These changes aim to make homeownership more affordable and secure for future generations.
7. Buying Yourself Out
Leaseholders may consider buying out ground rent to avoid escalating charges and simplify their financial obligations. This process involves purchasing the freehold of their property or obtaining a share of the freehold in the case of flats.
There are two primary methods for buying the freehold:
- Collective enfranchisement for flat owners, where all leaseholders in the building work together to buy the freehold. This process follows the formal procedures and timescales outlined in the Leasehold Reform, Housing and Urban Development Act 1993.
- For house owners, the Leasehold Reform Act 1967 allows leaseholders to buy the freehold of their house, either through informal negotiation with the freeholder or by initiating a formal legal process with the help of an experienced leasehold solicitor and professional valuation.
8. Reductions and Compensation
In light of the ground rent scandal, the Competition Market Authority (CMA) has secured commitments from major homebuilders to stop them doubling their charges annually for leaseholders. Companies such as Aviva, Persimmon, Countryside Partnerships, and Taylor Wimpey have agreed to return to the rate at which it was initially set when the property was first purchased. The CMA’s investigation is ongoing, with other companies under scrutiny.
Some developers, such as Taylor Wimpey, have also offered compensation schemes to affected homeowners to address the financial impact of the ground rent scandal.
9. Retirement Properties
The ban on charges for new residential leases also extends to retirement properties. This change came into effect for new leases of properties after 1 April 2023, providing the same benefits to retirement property leaseholders now as other residential leaseholders.
10. Ground Rent vs. Service Charge
It is essential to understand that ground rent is separate from the service charge, which covers the cost of maintaining and managing communal areas and services in a leasehold property. GR is a contractual rental payment for occupying a portion of the land, while the service charge is associated with the provision of maintenance and services.
In conclusion, understanding ground rent and its implications is crucial for leasehold property owners in the United Kingdom. With recent reforms and the upcoming ban on ground rent charges for new leases, the landscape of leasehold property ownership is changing, making it more affordable and transparent for future generations of homebuyers.