What is ground rent?
It is a sum which the owner of a leasehold property pays each year to the owner of the freehold. Unlike the service charge, the freeholder does not need to provide a service in return. Sometimes this may be a nominal amount, but more usually they increase over time, for instance by inflation.
Doubling ground rent clauses
Before 30 June 2022, leases often contained clauses obliging leaseholders to pay a rent which doubled after a set periods of time. For instance, if it started at £250, and doubled every 10 years, this could become £2,000 after 30 years. These are referred to as doubling ground rent clauses.
These clauses are very unpopular with lenders (eg Nationwide). Consequently, onerous clauses can make a property difficult to sell to anyone other than a cash buyer, unless the freeholder agrees to amend the clause.
Although the new Ground Rent Act 2022 introduced a ban on these clauses, the ban only benefits new leases.
Competition and Markets Investigation
The Competition and Markets Authority launched an investigation in 2019 into possible breaches of consumer protection law by several housing developers relating to doubling ground rent clauses. The good news is that several have since entered into undertakings to remove these clauses from the leases, and not to increase the amount. Here’s an example of one of these undertakings, by Adriatic.
But inevitably there are some slightly less onerous clauses that are still in place, and some housing developers have not yet agreed to remove them.
Final thoughts
Ground rents are a key issue to watch out for when buying leasehold property or if buying out the freehold. Click here for more information about the pros and cons of houses versus flats.
