Can ground rent affect saleability
Explaining all things ground rent and exploring the ground rent scandal.
Please note; On 30th June 2022, the Leasehold Reform Act 2022 came into play. The new regulations have effectively abolished ground rent for anyone buying a new home on a lease of 21 years or longer.
Imagine buying a house; everything seems perfect—great location, views, and décor inside. You'd go so far as to say this is your dream home. The day you've been dreaming about finally comes, and you get the keys to your new home. You move in, and everything is precisely as you planned. That is until you're a few years down the line and you hit a bump in the road — high ground rent.
When you purchased the property, and the terms of your lease were laid out, there was no mention that your £100-a-year ground rent would double every ten years. The doubling ground rent becomes burdensome, and you can't afford to pay it, so you try to sell the property.
You cannot sell it due to the burdensome ground rent, and now you're stuck. You're stuck with bills you can't pay, with anyone wanting to buy it.
You decide to speak to the freehold owner about buying it, as you were quoted about £2000-£3000 to buy it, and you could afford it. However, without you knowing, the freehold has been sold to a foreign investor. Who is quoting you £13,000 to buy the freehold — meaning you are stuck.
Although this is just a made-up scenario, for many, this is a reality. According to the BBC, an estimated 100,000 people have been affected by situations like this, causing it to get a name for itself - the 'ground rent scandal'.
In 2019, the CMA (Competition and Markets Authority) started to act against housebuilders to help buyers stuck in this 'leasehold trap'. As of 2022, thousands of leaseholders stuck in the scandal could get their money back.
Whether this is all new to you or you're just looking to refresh your ground rent knowledge, we have everything you need to know. We also reveal the critical answer to 'can ground rent affect saleability' and if it's possible to get yourself out of a bad ground rent situation.
What is ground rent?
Ground rent is a fee the leaseholder pays yearly to the owner of the property's freehold. In a freehold property, you don't pay ground rent, as you own the land your property is on.
The terms of how ground rent is paid will be set out in the lease, stating whether it should be delivered in one yearly instalment, half-yearly or quarterly.
There are two types of ground rent – fixed and escalating. Fixed ground rent will mean the fee will remain unchanged throughout the lease, whereas escalating, as you may have guessed, increases over the course of the lease.
Details of when the ground rent will increase and how much will be laid out in the lease.
Why do I pay ground rent?
Ground rent is paid by those who own a leasehold property as they don't own the land the property is on. The terms of ground rent will be laid out in the lease and shouldn't change if the owner of the freehold changes. Although this has yet to happen, the ground rent will be reasonably priced.
The 'ground rent scandal' got its name due to the freeholders setting unfair ground rent prices in their leases, causing ground rent to escalate so much that leaseholders couldn't afford to live in the property.
We'll go through this in more detail later, so we'll leave that there for now…
Is it worth buying a ground rent?
If you are an investor, buying ground rent in the right circumstances and depending on your specific investment objectives can be beneficial.
Historical data shows that it is possible to gain a return of five to ten per cent per annum on ground rent.
What's included in ground rent?
Ground rent only covers the cost of the land the property is on. Essentially, it's the rent you're paying for the ground, hence the name 'ground rent'. It doesn't include house repayments or rent for the property, or any of the bills.
It also doesn't cover maintenance, building repairs or costs of communal upkeep areas. There's a separate charge for these costs, and this is called a service charge.
What is a service charge?
The main difference between a service charge and ground rent is that the service charge applies to the costs associated with maintenance and repairs, whereas ground rent only covers the land cost.
A service charge covers the costs of running the building and upkeeping communal areas, for example, a collaborative garden/open green space.
Your service charge could differ from your neighbours; the costs are divided by looking at the value of your property.
This means you will pay a higher service charge if you have more bedrooms than your neighbours. Generally, you will pay a service charge if you live in a development or a building of flats.
How much is the average ground rent?
The typical ground rent can be anything up to £400 per year (Shelter), with most ground rents starting at about £50-£100 per year. However, ground rent may not be a fixed fee and may increase over time. We'll cover more on how much ground rent can increase later, so make sure you keep reading to find out the answer!
Why is my ground rent so high?
Your ground rent may be higher than you thought because it has increased following a published formula; the retail prices index. In some cases, it may increase to a percentage of open market value; in others, it may double every ten years.
Can I buy out ground rent?
Yes, you can. If you own the home but pay a yearly ground rent to the landowner or freeholder, you can apply to the HM Land Registry to buy out the ground rent.
This would mean that you would no longer need to pay additional ground rent to a landowner as you would own the land.
Can I refuse to pay ground rent?
If you refuse to pay ground rent, the freeholder can take legal action. They can apply to the court for repossession of the property in a type of action known as 'forfeiture action'.
Forfeiture action can only occur if you have been in ground rent arrears for three or more years or you owe £350 or more in a combination of ground rent, service charges and administration charges.
The freeholder can also impose penalty charges if you refuse to pay your ground rent.
If you have a mortgage, the lender may be prepared to pay your ground rent arrears and include this in your total house repayments debt.
You will be given four weeks to repay the arrears, and if you can pay what you owe, your lease can continue as usual, and any legal action will cease.
How much can ground rent increase?
The increase in ground rent will depend on the terms of your lease. If you're lucky enough to get a fixed rate of ground rent, you won't need to worry about this.
In most cases, ground rent will increase by a certain amount every 33 years or according to the formula (in line with the retail price index, for example).
If your ground rent increase is according to a formula, it will be difficult to predict future costs.
There's speculation around the fairness of ground rent increases relying on a formula, so much so that it's currently under investigation by the CMA.
Escalating ground rent can be very costly and often become so high that residents must attempt to sell their property, as they can no longer afford the high costs. You can get rid of ground rent, which is coming next, so hold that thought!
Here's an example of just how costly escalating ground rent can be:
Let's say the leasehold property you're buying initially had a ground rent of £100 per year, doubling every ten years.
This doubling ground rent will continue every ten years for the lease, which is often 999 years long.
You're buying the leasehold just 40 years into the lease, meaning the ground rent has already increased to £1600 per year, an extra £1500 more each year compared to when the lease was made!
How do I get rid of ground rent?
So, if you're reading this as you're about to complete a leasehold property, please don't panic!
There is a way you're able to get rid of ground rent, and we're about to break it down for you…
To get rid of ground rent, you'll have the option to buy the property's freehold.
This process differs slightly in a house compared to in a flat, as in a flat, you need at least 50% of the building's flats to buy the freehold.
There are also specific criteria that properties must meet to buy the freehold:
The current lease must have at least 21 years left.
It must not be a commercial lease.
If in a flat - building must contain at least two flats.
The property must not be a charitable housing trust, national trust or cathedral precinct.
Two routes can be taken when buying the freehold: a formal and informal course. Following the formal route is more costly and means all parties must follow the strict instructions and timescales set out by law.
The formal way does, however, offer more protection to leaseholders if they're unable to agree on terms or prices with the freeholder.
Through an informal route, there are fewer costs, and the leaseholders can go directly to the freeholder to ask if they want to sell the freehold.
If the freeholder agrees, negotiations can begin between the two parties, and if talks fall through, leaseholders who comply with the criteria can take the process down the formal route.
If you're asking us – we say it may be best to go down the informal route first, as it may be more cost-effective.
Then, if negotiations fall through, you can go down the formal path, giving deadlines and more protection.
Although buying the freehold will mean no ground rent, control over service charges, and potentially adding value to your home, there are also downsides resulting from the process.
For example, it is a time-consuming, costly manoeuvre and relies on your neighbour's co-operation.
Alongside this, the lease stays the same and will require help from a solicitor to rewrite or rephrase the lease, incurring further costs.
How do I know if my property is freehold?
If the flat or house you own has a lease, this is a simple indication that your property is leasehold.
This leasing document should have been given to you by the solicitor who advised you on your purchase.
You can also go on the Land registry website to search for the entry of the property to obtain a copy of the title, which will confirm whether the property is leasehold or freehold.
Although, you must keep in mind that not all properties are registered on the Land registry.
However, if you're buying a new build, your property will most likely be freehold, as the government decided on 27th June 2019 that all new builds will be sold as freehold (Gov.UK).
If the freeholder decides they want to sell the freehold of the property, they must approach the leaseholders first to offer the chance to buy it.
The lease terms will state that freeholders must provide leaseholders with the 'right of first refusal before a freehold is sold, but this isn't to say this has always happened…
What does ground rent for sale mean?
Ground rent for sale is when a freehold property with more than one leasehold unit (like a block of flats), where each leaseholder pays ground rent, is put up for sale.
What is the ground rent scandal?
The ground rent scandal hit the headlines in 2017 when freeholders included unfair ground rent charges in their lease terms, meaning ground rent spiralled so high that leaseholders could no longer afford to live in their homes and also struggled to sell them.
Generally, the buyers were being sold leaseholds without fully understanding the contract they were entering into. This was followed by freeholders selling the freehold to offshore investors without offering the leaseholders the chance to buy it first. These offshore investors would then demand burdensome ground rents.
In case you're unsure - ground rent becomes 'burdensome' when it's disproportionate to the property's value.
Freeholders have to set out in the contract what the increases in ground rent will be and how often they'll occur, but they can write in the assurance that they will review ground rent every 5,10 or 25 years. This allows freeholders to increase ground rent at each review.
Let's say a freeholder states in the lease that ground rent will be £200 per year, doubling every 33 years.
However, the lease also said they would review ground rent every ten years.
After the first ten years during the review, the freeholder decides to double the ground rent, and now, ground rent will continue to double every ten years instead of every 33 years.
This means that after 100 years, the leaseholders will have to pay £204,800 per year just for ground rent!
This leaves leaseholders unable to pay ground rent, bills, mortgages, and service charges. It will also mean the leaseholder struggles to sell the property due to these burdensome ground rent charges.
Now can you see why the ground rent scandal hit the headlines and gave ground rent a bad name?
Will ground rent be abolished?
It already has! In June 2022, new legislation was passed, which meant that all newly built properties would have their ground rent permanently set to zero.
Will leasehold be abolished in the UK?
There aren't plans to abolish leaseholds in the UK at the moment, but as part of the new legislation brought into effect in 2022, there are aims to make homeownership fairer and more transparent for future leaseholders. This is the first step in many towards leasehold transparency.
Can ground rent affect saleability?
Due to the ground rent scandal, most buyers are now aware of what ground rent is and, more importantly, what can go wrong with ground rent. This has resulted in most buyers not buying properties which have ground rent.
As a result of buyers not purchasing these properties, most banks and building societies will refuse to lend on properties with ground rent.
This, unfortunately, means the answer to 'is it hard to sell a leasehold property is yes; sadly, it is.
As we mentioned earlier, courts have only become a threat to housebuilders since this year.
On 4th September 2020, the Competition and Markets Authority (CMA) opened enforcement cases focusing on four housebuilders: Barratt Developments, Countryside Properties, Persimmon Homes and Taylor Wimpey.
The CMA's action relates to two specific areas of concern – mis-selling and unfair contract agreements around ground rent.
As of 30th June 2022, The Leasehold Reform Act 2022 establishes a ban on ground rents for anyone buying a new home for a 21-year or longer lease. This means that ground rent has been abolished.
More than 5,000 households can now claim compensation after being caught up in the ground rent scandal.
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