Lease Extensions and Enfranchisement Claims

The Ground Rent Issue

Ground rent is a rent paid by the flat owner (or leaseholder) to their landlord (generally the freeholder) for living in their property. The details of any ground rent payable are contained in the lease.

15 Mar 2023

Team name
Shah Al Hoque

Shah Al Hoque

Ground rent should not be confused with ‘service charge’. Whilst service charge is a payment to the freeholder or management company for the costs of maintaining the building facilities and services, ground rent is a payment to the freeholder for owning the property and allowing you to live there.

If the property ground rent is above £250 (or £1000 in Greater London), there are a number of issues that you must be made aware of.

The Ground Rent Issues

Repossession

If your ground rent is above the £250 threshold (or £1000 in Greater London) the lease may be considered an assured tenancy and in the event of you falling into 3 months of ground rent arrears, then your landlord has a right to repossess the property. For an assured tenancy a landlord can issue a notice to repossess the property under section 8 of the Housing Act 1988.

Landlords usually have a provision in the lease known as forfeiture, which allows the landlord to evict the leaseholder if they break a term or terms of the lease, such as not paying ground rent or not keeping the property in repair.

However, under section 8, Landlords have an easier way of repossessing the property. Rather than going through the legal process of forfeiture, the freeholder can serve a section 8 notice to evict you and enforce their right to repossession, thereby ending the lease and leaving you (and your lender if you have one) with no interest in the property. A Court will have no means of discretion in this instance, and you will have to vacate the property.

Buying with a mortgage

Some lenders are hesitant to lend on properties with rents in excess of £250 outside of London and £1,000.00 in Greater London due to the risk of possession by a landlord in the event of ground rent arrears. In fact, many lenders also prohibit lending where the lease provides for the ground rent increasing during the first 21 years of the lease.

Selling to a buyer with a mortgage

This has become a particular issue of recent times and even if you may not require a mortgage yourself as a buyer or leaseholder, you may still experience issues if you decide to sell the flat in the future. Should you find a prospective buyer, but your buyer needs a mortgage to purchase the property, they may struggle to find a lender, and could even pull out of the purchase due to this issue.

The Governments 2022 Solution

The Government introduced the Ground Rent Act which applies to new leases granted from 30th June 2022 and looks to solve the ground rent issue moving forward. The Act prevents the ground rent for any newly created lease being higher than a ‘peppercorn rent’ (nothing) per year.

However, if your lease was granted before 30th June 2022, your lease is not defective in any way, but you may wish to consider the following options.

Your Options

Deed of Variation

The first and most preferred option is entering into a deed of variation of the lease. A deed of variation is an agreement between yourself and the landlord which allows the terms of the lease to be changed. With the landlord’s agreement, the ground rent can be reduced below the threshold and documented within the deed. A deed of variation can also deal with any other alterations that may be needed with regards to the lease.

Please note that the landlord may charge a premium (price) to compensate for the loss of rent moving forward and will also undoubtedly require their legal fees to be met.

Indemnity Policy

The second less preferred option is purchasing an indemnity policy. An indemnity policy is an insurance policy which covers a defect which may not be able to be resolved. Instead of trying to resolve the issue, you would take out an insurance policy to protect your interests and potentially also the interests of any mortgage lender.  However, this again will only protect their interests if you default in your ground rent payment. This does not reduce the ground rent, nor provide any solutions for you if the landlord has given a notice to repossess the property due to nonpayment of rent.

Lease extensions

A third option is extending the lease which will reduce the rent to a peppercorn. However, a statutory lease extension pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 is only available to leaseholders who have been registered as proprietor of the property of the property at HM Land Registry for at least 2 years. A lease can be extended informally with agreement with the landlord; but the landlord will not be governed by the same rules as with a statutory lease extension and the premium payable is likely to be less favourable.

With either a statutory (formal) lease extension or an informal lease extension a leaseholder will need to pay a premium to the landlord for the additional term of years and will also need to meet the landlord’s legal and surveyors fees in addition to their own.

 

M&P Commentary

Shah Al Hoque, Paralegal in our Residential Property team, said:

“The experienced Residential Conveyancing team at Mullis & Peake are available to assist you in your purchase or sale. Should you turn out to be subject to the ground rent issue in your potential purchase or sale, the team can assist you in resolving this; by extending your lease, drafting a deed of variation to alter the lease, and even finding an appropriate indemnity policy for you and your lender.”

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