What is Ground Rent?
Originally it was a rent paid by a tenant to a landlord to reflect the value of the ground that was being let. The rent was usually low or nominal.
The rent was low or nominal because a tenant would have already paid to a landlord a capital sum of money (a premium) on the grant of a long lease. A landlord would not therefore need to charge a tenant full market rent as well as receiving the premium for a long lease.
In recent years, ground rent is seen as merely a tool, whereby landlords continue to extract money from tenants throughout the term of a long lease despite landlords acknowledging receipt of a premium (capital sum of money) paid by tenants for a long lease.
Today, the actual value of land, less any premium paid by a tenant to the landlord, is not taken into consideration when calculating how much ground rent should be paid. Ground rent has changed from being low or nominal to significantly high, even extortionate.
What is Escalating Ground Rent?
It is usual for a long lease to contain a clause enabling a landlord to review the ground rent after a certain period of time. The idea behind such a clause was to enable a landlord to review the rent being charged and potentially charge a higher rent if the value of the land had increased. Any rent increase would be reasonable and in accordance with such increase in the value of the land thereby avoiding the landlord losing out from the effects of inflation.
However, a number of leases, especially prevalent among new builds, contain review clauses that provide for an automatic doubling of ground rent, in some cases doubling as often as every ten years. This has become a well-publicised national scandal. Buyers of leasehold properties which contain these review clauses have failed to realize that a starting rent at £200.00 doubling every 10 years means that in 50 years’ time, the yearly rent would reach £3,200.00 and in 100 years £102,400.00. These leases are in fact worthless due to the fixed vast liabilities attached to the lease.
Increased awareness of the damaging potential of these clauses has meant that they are frequently a problem for prospective purchasers of leasehold properties. Mortgage lenders have also become increasingly wary of these clauses, with many refusing to lend on properties with rent review clauses that they consider to be onerous.
As of late, ground rent clauses which automatically double the rent every 10 years have fallen out of favour with developers/landlords. Instead, they now opt for ground rent to be increased by the percentage increase in the retail price index (RPI) over the preceding 10 year period. These clauses are worded specifically so that the rent will either remain the same even if there is a decrease in the RPI (no matter how unlikely) meaning that rent is upwards only with no capped maximum rent.
In general, as mentioned above, there is no objection to a lease containing provision for a periodic increase of the ground rent, however, the amount of increase must be fixed or readily established and reasonable. For many lenders there is a concern that these clauses have no guarantee of the future rent being reasonable. The future of the RPI is unknown resulting in risk – however little that risk may be
Anyone proposing to become a tenant under a new lease should therefore be willing to challenge an RPI-linked ground rent clause.
What are my options?
Unfortunately, many leaseholders who have an escalating ground rent clause in their lease are not aware of the existence of the clause until they attempt to sell their property or extend their lease.
Landlords may agree to new, less onerous rent review clauses either as part of a lease extension or by way of a Deed of Variation to an existing lease.
If your landlord has agreed to vary the terms of your lease in favour of a fairer ground rent provision by way of deed of variation contact AS Solicitors on 020 8318 4345. Often landlords will agree to contribute toward a tenants legal costs for the same provided the deed of variation completes within 6 months from receipt of the draft.