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  1. Blog
  2. What is Ground Rent? The end of a struggle for leaseholders
Advice about properties
18 July 2022

What is Ground Rent? The end of a struggle for leaseholders

Sam Edwards
Writer
What is ground rent?

Table of contents

  1. 1. What is ground rent?
  2. 2. Do you have to pay ground rent?
  3. 3. The ground rent scandal
  4. 4. The Leasehold Reform (Ground Rent) Act 2022
  5. 5. Can I buy the freehold of my leasehold house?
  6. 6. Summary: Ground rents - for leaseholds of the past?

Land has been sold, rented and inherited for nearly one thousand years in Great Britain. Since William of Normandy took over administration in England, the systems of leasehold and freehold have governed the ownership of property across the country.

As a result, we have William to thank for ground rent in England and Wales. But what is this payment, and how does it affect leasehold properties? And does the Leasehold Reform Act 2022 really mean that ground rent is no more?

What is ground rent?

Ground rent means an annual (or bi-annual) payment made by a leaseholder to the freeholder. But why is it paid?

Flats and apartments, by nature, are built on top of each other and occupy the same area of ground. As such, the freeholder charges the leasehold ground rent for living there.

It’s not just flats and apartments however. Some semi-detached and detached houses are leaseholds with all the caveats of freehold, except for their annual payments of ground rent.

Do you have to pay ground rent?

Until very recently, all tenants were obligated to pay ground rent and service charges as outlined in their contracts. It’s a contractual rental payment - which means that if you fail to pay it in full, then the freeholder can reclaim your property as their own for breach of contractual agreement.

As of June 2022, all future residential tenants beginning new leases will no longer be charged any ground rent.

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How much is ground rent?

The cost of ground rent varies considerably, but for the most part, it’s fairly cheap. Former local authority properties can be bought with very minimal ground rent due. Ultimately, your lease outlines how much rent must be paid and when it has to be paid. It is usually paid annually.

Ground rent can either be fixed or escalating, costing either X per year or escalating every couple of decades by a set amount - for instance, £50 for 30 years, and £100 for the next 30 years.

Ground rent can also be something known as ‘peppercorn ground rent’, which means it’s of such minimal value that it never needs to be paid. Peppercorn rent is an acknowledgement of the rent’s symbolic value.

You do not have to pay ground rent until the freeholder requests it. This request, or demand for a better word, is delivered to your address. If the amount is low (as with peppercorn rents), it’s typical for freeholders not to ask for it.

Demands must be in writing and include the following information:

  1. Name of leaseholder
  2. The period that demand covers
  3. How much you, the leaseholder, has to pay
  4. Name and address of freeholder
  5. Date on which ground rent is due

While leaseholders finishing their current tenancies are still expected to pay ground rent, new leases are no longer contractually obligated to pay it as of June 2022. The result of numerous scandals over the years, this change in policy affects all types of properties including residential and care homes.

The ground rent scandal

Traditionally, ground rent has been treated as a fixed, alternating or peppercorn payment, with fees remaining fairly low throughout the course of the lease. However, with the potential for money to be made, some freeholders have taken advantage of the leasehold system.

In the 2010s, freeholders of new build properties began exploiting ground rent. New leases were either incremented with fixed high costs, or clauses that detailed increases over frequent periods. Research suggested ground rent for some properties would reach £10,000 pa by 2060.

As a result, homeowners struggled to live in these expensive leasehold properties, and were even rendered unable to sell due to the market’s gradual awareness of their extortionate costs. Properties would receive mortgage refusals from lenders and their valuers, making them sellable only below the market price.

The reputation of leasehold properties deteriorated rapidly. According to a survey conducted by NAEA Propertymark, over 94% of leasehold owners regretted buying a leasehold.

For many, ground rent is an example of unfair leasehold practices that have endured since the feudal age.

Ground rent indemnity policy

Indemnity policies are insurance policies used to cover a defect relating to the property. With an indemnity policy for ground rent (a forfeiture of lease indemnity), should the landlord decide to regain possession of the property as a result of ground rent issues, the mortgage lender is protected.

Why would you need a ground rent indemnity policy?

As mentioned above, a primary reason for the decline in leasehold property sales is the buyer’s inability to find a viable mortgage lender.

When ground rents are higher than £250 (outside of London) or £1000 (London), the leasehold becomes an Assured Tenancy Agreement. This means that if the rent becomes defaulted, the landlord would gain ownership of the property, rather than the mortgage lender.

Naturally, this makes lenders less enthusiastic about funding leasehold purchases. The collateral they would have gained from their investment (ownership of the property) is lost to the freeholder.

This is why some buyers choose to take out ground rent indemnity policies. The goal is to make their property purchase more attractive to mortgage lenders.

The limit on indemnity is to about £234,000 of the property price. The policy protects the lender, not the purchaser. It depends on the lender as to whether the policy is accepted or not.

Ground rent Indemnity policy cost

A ground rent indemnity policy usually costs between £50 and £100, but it depends on the price of the property.

The Leasehold Reform (Ground Rent) Act 2022

In 2018 the government announced there would be reform to tackle the aggressive rising ground rents of leasehold properties. Reform materialised in the Leasehold Reform Act of 2022. The Ground Rent Act prohibited ground rents of more than one ‘peppercorn’ a year on new long leases.

The Act is fairly new, which means it's too early to discern its effectiveness. Indeed, for some leaseholders, there’s still much to do. Those already in a long lease must continue to pay ground rent until their scheduled end. For most new residential leases however, this Act is no doubt an excellent step in the right direction.

If you’re a current leaseholder and want to capitalise on this reform, extending your current lease through the non-statutory route will reduce your paying rent to a peppercorn. In other words, you will be liable for zero ground rent on the newly extended term.

Can I buy the freehold of my leasehold house?

Of course, one way to eliminate the problem of ground rent altogether is to buy the freehold of your leasehold property. While most leaseholds are problem free, and upkeep and repairs of communal areas are usually paid for, it can be extremely beneficial to buy the freehold of your property.

If you own a flat…

You need to buy a share of the freehold. All leaseholders need to come together to buy the freehold. Under the Leasehold Reform, Housing and Urban Development Act 1993, leaseholders can group together in what’s called a collective enfranchisement and buy the freehold.

For more details, check out the official page for the Act - all the formal procedures and timescales can be followed there. Leaseholders can also approach the freeholder together and negotiate a deal formally.

If you own a house…

If you own the lease to your house, you can contact the freeholder to purchase the freehold. Get a valuation from a top-performing local estate agent, and instruct an experienced leasehold conveyancer before you make an offer.

Summary: Ground rents - for leaseholds of the past?

Under the new Leasehold Reform (Ground Rent) Act, ground rents for new long residential leases in England and Wales have been abolished. It seems that for future homebuyers, ground rent has ceased to be a concern.

This is the first step in a government reform package ‘to create (a) fairer housing system, levelling up opportunities for more people’. And while certainly momentous for new homebuyers, existing leaseholders must wait for any (if any) future legislation to address their ground rent.

Indeed, for current long leaseholders, it might now be even harder to sell their properties. With new long leases unburdened by ground rent, older leases have become all the less attractive to new buyers.

Our advice to these homeowners is to look into extending your lease (thereby reducing it to a peppercorn rent) or buying the freehold.

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