11th April 2019
Escalating 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, known as ground rent. This will be fixed or it may escalate during the course of the lease.
Once the remaining term of a lease reduces to 80 years, it is wise to extend the term, making the property more marketable and appealing for mortgagees to lend on.
Lease terms can be extended via the statutory route under the Leasehold Reform Act 1993 or by negotiation. Under the statutory route, a premium is agreed and ground rent is reduced to a ‘peppercorn’ so no ground rent is paid. If negotiated, landlords may ‘step’ ground rent payments so that they double. For example, rent may start at £150 per annum and increase to £300 per annum in 20 years’ time.
Once ground rent reaches £250 per annum (over £1,000 in London) the lease falls within the Housing Act 1988 and will be deemed an Assured Shorthold Tenancy (AST). This should not present a problem unless the ground rent goes unpaid. The issue is then lease termination. Most leases give the landlord a right to “forfeit” if rent goes unpaid for 21 days; but the courts normally have power to grant relief, cancelling the forfeiture so long as the arrears are paid off. The problem is that the power to grant relief does not apply to ASTs if at least three months’ rent is more than three months overdue. The court has no choice but to terminate the lease and give possession back to the freeholder. Prudent lessees will pay promptly, but a bank with a mortgage over the property may not find out until it is too late. Some banks are therefore questioning whether a lease with a high or escalating ground rent is acceptable security for a mortgage.
Therefore, when considering whether to purchase a leasehold property, it is wise to immediately check the ground rent terms as it could prevent you from proceeding with your purchase.
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This article was first published in the April 2019 edition of Index Magazine www.indexmagazine.co.uk