GROUND RENT ISSUES
Over recent months, there has been increased interest and increased press coverage in relation to ground rents.
Ground rents are common and represent the annual amount payable under the term of a lease by way of rent. They can vary significantly from a peppercorn (Effectively zero rent) to far more substantial amounts. It is not uncommon for the lease to provide for the rent to increase and this is the first area of concern.
Many leases begin with a ground rent that starts at a fairly innocuous amount, for example £200.00 per annum. The lease, however, may well provide for the rent to increase by an arbitrary multiplier, in some instances doubling every 10 years. This may not seem unreasonable when given a cursory look. If, however, the lease were for 125 years, the rent in the last 5 years would, in fact, be £819200.00 per annum. This would not be acceptable to a majority of buyers and mortgage companies. In such circumstances, the only option may be to have the lease varied to reduce the rent but this may well involve the payment of a premium to the freeholder as well as the Freeholder's legal fees. This is, obviously, a fairly dramatic example but many lenders will not accept a lease where the rent arbitrarily doubles or where the potential rent increases are deemed to be unreasonable.
The second issue that has arisen is in relation to ground rents over £250.00 (or £1000.00 in London). With rents at this level or above, the lease falls within the definition of an Assured Shorthold Tenancy under the Housing Act 1988 and this has a significant impact on the remedies available to the Freeholder should that rent go unpaid.
Most leases give the Freeholder the right to forfeit a lease if the rent goes unpaid for 21 days. With long, residential leases, the courts have the power to grant relief and stop the forfeiture of the lease if the arrears are paid off. This is not the case if the lease is classed as an Assured Shorthold Tenancy and if at least 3 month's rent has been owing for more than 3 months. In these cases, the court has no choice but to terminate the lease losing you your property and any mortgage company their security.
The somewhat draconian rules only apply if the rent is outstanding both when the landlord serves notice for possession and at the date of the court hearing and so there is the opportunity to pay and prevent forfeiture. The issue is that mortgage companies often do not find out until it is too late that the amounts are owing.
This could also impact on your right of first refusal. If a freeholder wishes to sell the freehold to a property then it must normally be offered to the tenants first under a right of first refusal. This only applies of the tenants are classed as 'qualifying tenants' but an Assured Shorthold Tenancy is not a qualifying tenancy and so any right of first refusal may be lost if more than half of the tenancies in a block are classed as Assured Shorthold Tenancies.
There are exceptions. These provisions do not apply if you do not occupy the property as your only or principal home or if the lease is granted to a company.
Aside from any concerns that this may provide to you as an owner or prospective purchaser of a property, this has an impact on the ability to secure mortgage finance on such a property. Many lenders now have imposed conditions on the maximum starting rent that they will accept, by how much and how often it can increase or, in more general terms, lenders will not accept what they deem to be unreasonable multipliers (e.g. the doubling of rent every 10 years).
In the long term, it is hoped that legislation will be introduced to close this loophole by dis-applying the Housing Act 1988 forfeiture procedures to leases over 21 years and for new leases being granted it is hoped that Freeholders will agree to draft these so as to comply with current mortgage company requirements.
For those leases already in existence, however, the ideal solution would be for the Freeholder to agree to vary (change) the lease so as to have compliant ground rent provisions. This, however, will often result in payments and additional legal fees on the part of the current owner.
There is the alternative of indemnity insurance but this would be subject to any such policy being acceptable to the buyer and to any lender involved in the transaction.
Chattertons are experienced in dealing with such matters and are ideally placed to assist you with any concerns that you may have in relation to the ground rent in a lease.