Rising ground rents in leases of residential properties

By ‘review’ we mean increase as it is extremely rare for a lease to contain a provision whereby the ground rent can actually decrease. Some leases, usually older leases, contain a provision for a fixed ground rent to be payable throughout the lease term and if this is not subsequently varied by agreement between the landlord and tenant, you may well find that your lease requires you to make an annual ground rent payment of 5 guineas! Of more relevance some leases, such as those granted by local authorities under the ‘Right to Buy’ provisions of the Housing Act 1980 provide for those leases to have a fixed ground rent of £10 per annum, and are not subject to variation.

Where the lease does contain provision for a review of the ground rent, the prospective buyer and his or her solicitor will need to look at how the review works. A simple rent review clause may state the amount of the new ground rent which would be payable after a specific date, for example an annual ground rent of £100 to be charged from the commencement of the lease until the 25th anniversary of the commencement date, at which point the ground rent increases to £250 per annum. Other ground rent review provisions can however be more complicated, for example a ground rent which increases at set intervals in line with an increase of an index, quite often the Retail Prices Index. Other ground rent review mechanisms contain complex formulae to arrive at the new figure.

Buyers purchasing a leasehold property with a mortgage will certainly need to take the ground rent provisions into account. Mortgage lenders are happy to lend on such properties with periodic increasing ground rent provided that the amount of the increased ground rent is ‘fixed or can be readily established and is reasonable’. Of course, what is reasonable to one mortgage lender and its valuer may not be reasonable to another, but lenders will certainly take other factors into account, for example the property’s market value, the frequency of the review, and the length of the remaining lease term. When buying a new build leasehold property, a mortgage lender may impose new rules which will govern whether or not it will lend on that property. For example, the Nationwide Building Society currently has a policy that for any new build leasehold property (excluding shared ownership properties) the amount of the initial ground rent payable per annum must not exceed 0.1% of the property’s value. Furthermore, it states that for such properties unreasonable multipliers used in the lease to increase the ground rent, e.g. doubling every 5, 10 or 15 years, would be unreasonable and they may well refuse then to lend on such properties.

When deciding on a property to buy, the level of ground rent may not be one of the first matters a buyer takes into account, but it should certainly be a factor and considered particularly if buying with mortgage finance.