Ground rent is payable to a freeholder by the leaseholder normally on an annual basis and the cost could be as cheap as £10. Over the years freeholders have looked to make more money from leaseholders on an annual basis and increased the ground rent payable. The Government have now capped the maximum amount of ground rent payable within a lease to £250 outside of London and £1,000 inside of London.
Lease Extension
Under the Leasehold Reform (Ground Rent) Act 2022, leases extended informally must have peppercorn ground rent for the duration of the extension, once the pre-existing lease has expired.
There are some exceptions to this, which can be explained by your lease extension solicitor. When following the formal route, the ground rent falls to peppercorn from the completion of the lease extension, so affects the remainder of the pre-existing lease as well as the new extension.
The Leasehold and Freehold Reform Bill is currently with the House of Lords at Committee stage. It aims to increase the standard length of leases for both flats and houses, allowing leaseholders to secure a 990-year extension at nominal ground rent.
Where the ground rent exceeds £250/£1,000 then you need to draft a deed of variation prior to selling or else you will struggle to find a buyer who is getting a mortgage to buy your property.
What is the problem with having ground rent over £250?
When your ground rent is more than 0.1% of the property value, or £250 (£1,000 in London), whichever is higher, or there is a clause in the lease that could mean it might increase to this level, you will struggle to:
- get a mortgage
- remortgaging your home or buy to let
- selling your home
The main reason for this is that ground rent over the £250 or £1,000 (in London) makes the lease an Assured Shorthold Tenancy (AST) which means the provisions of the Housing Act 1988 come into force and mean you could lose your leasehold if you fail to pay your ground rent. Most mortgage lenders won't lend where this is the case so in order to sell the property or remortgage, you need to negotiate with the freeholder to reduce the ground rent and for this to be noted within a
deed of variation.
What is the Housing Act 1988?
If your lease commenced after 1988 and is a long lease then your leasehold property could be considered as an Assured Shorthold Tenancy (like an AST rental agreement when you rent from a landlord) if:
- You pay more than £250 per year in ground rent (£1,000 for properties in London); and
- The property is your principle residence.
If this applies to you then it means the standard rules for leaseholders around forfeiture (and indeed relief from forfeiture) do not apply. This means that your normal thresholds for ground rent arrears and service charges do not apply when determining if you have breached your lease. The determination now sits within the Housing Act 1988 for tenancies.
What are the rules under the Act
Ground rent is defined as "rent lawfully due from the tenant" so if you have groung rent over £250 (£1,000) in London and you fail to pay you fail to pay your ground rent within three months then the Freeholder could file a Section 8 Notice and take back your leasehold from you. The exact wording states "if rent is payable yearly, at least three months’ rent is more than three months in arrears".
Whilst these are the grounds on which the Court must order possession, in practice could it happen? No it goesn't guarantee that the Court will grant a possession order but the risk is why mortgage lenders may choose not to lend on the property.
How do you reduce your ground rent?
2Once agreed, the freeholder and leaseholder instruct a solicitor to draft a deed of variation and all parties sign and have it witnessed
Does a deed of variation replace the whole lease?
No. The deed of variation will sit alongside the lease and will vary just the ground rent clause. Once drafted, executed and registered, the deed of variation has varied the ground rent clause and will allow an easier sale, purchase or remortgage.
