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Spiralling Ground Rents: The Small Print That’s Not So Small!

Posted on October 11, 2018
Spiralling Ground Rents - Jefferies

The topic of leasehold properties in England and Wales has rarely been out of the press in the past couple of years; so much so that the Government has now taken notice and is in the process of proposing changes to the law governing leasehold practices.

Previously, properties sold on a leasehold basis (both houses and flats) could be sold on a leasehold basis with a yearly ground rent due to the freeholder. Historically, ground rents were a nominal amount and didn’t cause a huge concern to buyers or mortgage lenders. However, when leaseholders do need to obtain lease extensions or new leases, developers and property investors used the mechanism of charging a ground rent to profit from leaseholders by charging what is initially a low ground rent with a high rent review.

These rent reviews include doubling every 10 years, increasing in line with the Retail Prices Index plus 5% and many others. Although the ground rent might start at £200 per year, which doesn’t sound like a huge amount, if this is to double every 10 years with a lease term of 999 years the ground rent at the end of the term can be over £100,000 per year!

Although the effect of a lease in 999 years doesn’t seem like something to worry about now, when trying to purchase your freehold or extend your lease the leaseholder effectively compensates the freeholder for their loss of ground rent.

As it has become near impossible for some leaseholders to extend their lease or purchase their freehold they are effectively trapped in the lease as they cannot sell or remortgage their property. It is becoming increasingly common for mortgage lenders to refuse to lend against these leases meaning that they also become unsellable or unmortgageable.

The Government has announced the ban on houses being sold on a leasehold basis and freeholders are now rarely seeking ground rents with reviews that aren’t in line with mortgage lenders requirements. However, at present, there is no general compensation scheme for flat owners who are already tied into leases with spiralling ground rents. Only one developer, Taylor Wimpey, has put money into a compensation scheme, but there are conditions attached to this compensation.

If you are concerned about the ground rent in your lease and would like to discuss extending your lease or purchasing your freehold please get in touch with Amelia Hayes.

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