Explaining all things ground rent and exploring the ground rent scandal.
Imagine you’re buying a house, and everything seems perfect. Great location, great views and great décor inside. In fact, you’d go so far 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 exactly as you planned (maybe even better than you planned!) That is until you’re a few years down the line and you hit a bump in the road.
What is this bump you ask?
Two words- ground rent.
Specifically, HIGH ground rent.
When purchasing the property and the terms of your lease were laid out, there was never mention of the fact your £100 a year ground rent was going to double every 10 years. The doubling ground rent becomes onerous and you can’t afford to pay it, so you try to sell the property.
The key word there is TRY to sell.
You’re unable to sell it due to the onerous ground rent and now you’re stuck. You’re stuck with bills you can’t pay, with no one wanting to buy it.
So, you decide to speak to the owner of the freehold about buying the freehold, as you were previously quoted about £2000-£3000 to buy it and you’re able to afford this. However, without you knowing the freehold has been sold to a foreign investor and they’re now quoting you £13,000 (WHAT?!) to buy the freehold. Now, you really are stuck.
Although this is just a made-up scenario, for many this is a reality. An estimated 100,000 people have been affected by situations like this (BBC), causing it to get a name for itself - the ‘ground rent scandal’.
Only recently has the CMA (Competition and Markets Authority) started to take action against housebuilders, to help buyers who are stuck in this ‘leasehold trap’. Although this is a start, the fight against onerous ground rent is far from over…
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 important answer to ‘can ground rent affect saleability’ and if it’s possible to get yourself out of a bad ground rent situation.
If you’re here to find out something specific, this menu will be your new friend. New to ground rent? Fab – best get scrolling…
- What is ground rent? How does it compare to a service charge?
- How much can ground rent increase?
- How do I get rid of ground rent?
- What is the ground rent scandal?
- Can ground rent affect saleability?
Struggling with ground rent and want to get out?
Ground rent is a fee which is paid each year by the leaseholder to the owner of the freehold of the property. 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 paid in a 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 by 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 isn’t to say this hasn’t happened or that the ground rent will be kept at a reasonable price.
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’re going to go through this in more detail later, so we’ll leave that there for now…
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 mortgage or rent for the property or any of the bills. It also doesn’t cover any maintenance, building repairs or costs of upkeeping communal 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 cost of the land. A service charge contributes to cover the costs of running the building and upkeeping communal areas, for example a communal garden/open green space.
Your service charge could be different to that of your neighbours, as the costs are divided by looking at value of your property. This means if you have a higher number of bedrooms compared to your neighbours, you will pay a higher service charge. Generally, you will pay a service charge if you live on a development or live in 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 the majority of ground rents starting at about £50-£100 per year. However, ground rent may not be a fixed fee and may increase over time. We’re going to cover more on how much ground rent can increase later, so make sure you keep reading to find out the answer!
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 take place 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’re refusing 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 mortgage debt.
You will be given four weeks to repay the arrears and if you’re able to pay what you owe; then legal action will be stopped, and your lease can continue as normal.
Need to be free of your ground rent property?
The increase in ground rent will be dependent upon terms in 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 a formula (in line with retail price index, for example). If your ground rent increase is according to a formula, then it will be difficult to predict what the future costs will be. There’s speculation around the fairness of ground rent increases relying on a formula, so much so it’s currently under investigation by the CMA.
Escalating ground rent can work out to be very costly and can often become so high that residents have to attempt to sell their property, as they can no longer afford the high costs. There is a way in which you can get rid of ground rent, which is coming up next so just 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, originally had a of ground rent £100 per year, with it doubling every 10 years.
This doubling ground rent will continue every 10 years for the duration of the lease, which are 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!
So, if you’re reading this as you’re about to complete on 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 freehold of the property. 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 take part in the buying of the freehold.
There are also certain criteria that properties must meet in order to buy the freehold:
- Current lease must have at least 21 years left
- Must not be a commercial lease
- If in a flat - building must contain at least 2 flats
- Building must not be a charitable housing trust, national trust or cathedral precinct
There are two routes that can be taken when buying the freehold, a formal and informal route. Following the formal route is more costly and means all parties must follow the strict instructions and timescales set out by law. The formal route does however offer more protection to leaseholders if they’re unable to agree on terms or price with the freeholder.
Through an informal route, there are fewer costs, and the leaseholders are able to 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 negotiations fall through, leaseholders who comply with the criteria are then able to 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’re able to go down the formal route, 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 which come as a result of the process.
For example, it is a time-consuming, costly manoeuvre and relies on your neighbours co-operation. Alongside this, the lease still stays the same and so will require the help from a solicitor to rewrite or rephrase the lease, incurring further costs.
If you're in a flat and want to know more about buying the freehold , have a read of this.
Can't afford to buy your freehold but want to stop paying ground rent?
How do I know if my property is freehold?
If the flat or house you own has a lease, then this is a simple indication your property is leasehold. This lease document should have been given to you by the solicitor who advised you on your purchase.
You're also able to go on the Land registry website to search for the entry of the property to be able to obtain a copy of the title, which will confirm whether the property is leasehold or freehold. Although, you must keep in mind not all properties are registered on Land registry.
However if you're buying a new build, your property will most likely be freehold, as it was decided by the government 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. This is because terms of the lease will state that leaseholders are required to be offered the ‘right of first refusal’ before a freehold is sold on, but this isn’t to say this has always happened…
The ground rent scandal hit the headlines in 2017, where it emerged that freeholders were including unfair ground rent charges in their lease terms, meaning ground rent spiraled so high that leaseholders could no longer afford to live in their home and also struggled to sell it.
Generally, the buyers were being sold leaseholds without fully understanding the contract they were entering into. This was then 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 onerous ground rents.
Incase you're unsure - ground rent becomes 'onerous' when it's disproportionate to the value of the property.
Freeholders have to set out in the contract what the increases in ground rent will be and how often they’ll occur, but can write in the contract that they will review ground rent every 5,10 or 25 years. This gives freeholders the opportunity to increase ground rent at each review.
Want to see an example of the ground rent scandal ‘in action’? Okay…
Let’s say a freeholder states in the lease that ground rent is going to be £200 per year, with it doubling every 33 years.
However, they have also said in the lease they’re going to review ground rent every 10 years.
After the first 10 years during the review, the freeholder decides to double the ground rent, and also decides that now, ground rent will continue to double every 10 years, instead of every 33 years.
This means after 100 years the leaseholders will have to pay £204,800 per year just for ground rent!
This, of course, leaves leaseholders unable to pay ground rent, as well as bills, mortgage payments, service charges etc and will also mean the leaseholder struggles to sell the property due to these onerous ground rent charges.
Now can you see why the ground rent scandal hit the headlines and gave ground rent a bad name?
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 buying 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.
Don't let ground rent stop you from selling...
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 in particular; 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.
Although this is a step in the right direction, there has currently been no conclusion, with 100,000 people still stuck in their leaseholds, with onerous ground rent and no way out…
BUT it’s not all bad news, as we know a way you can sell your leasehold property and break free from ground rent, with no worry of the sale falling through!
Now you're wondering HOW??!
Sell to us! No seriously, it is that simple!
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