Ground rent increases causing issues for leaseholders

Recently, there has been a wide range of media coverage concerning ground rent clauses within leases and, more specifically, concerning how the ground rent increases over the term of that lease. Ground rent is usually an annual sum payable by the leaseholder/tenant to the freeholder/landlord on leasehold properties. Historically, ground rents have been modest, reasonable, nominal sums which rose gradually over the lease term. However, more onerous ground rent clauses have been introduced which don’t only ask for a higher starting ground rent to be paid but also see the ground rent increase more regularly within the term and in an unreasonable nature, i.e., doubling every ten years.

Whilst the media has highlighted issues with this in regard to saleability, valuation, and mortgageability, these are not the only problem factors, and leaseholders should be cautious when entering into leases of this nature. Many leaseholders entering into long leases of, for example, 125 years, will be surprised to hear that their lease could potentially be an Assured Shorthold Tenancy (AST). If the ground rent exceeds £250 per annum (or £1,000 in London) at any point within the term, there is a risk that your long lease could qualify as an AST. Your lease would also need to meet the other criteria for an AST set out in the Housing Act 1988.

The main problem is that the freeholder could seek to gain possession of your property through the court if they can prove one or more of the grounds for possession. Most leases give the landlord a right to forfeit the lease if rent is unpaid for twenty-one days, but the courts usually have the power to grant relief, so long as the rent arrears are paid off. This provides protection for leaseholders as it offers more opportunity to pay the arrears off and avoid losing their property. The court does not hold this power in regard to an AST. If rent has remained unpaid for a period of at least three months and the landlord seeks to terminate the lease on this basis, the court has no choice but to terminate the lease and give possession of the property back to the freeholder.

Solicitors are required to comply with the UK Finance Mortgage Lenders Handbook which states: “We have no objection to a lease which contains provision for a periodic increase of the ground rent provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable.” Each lender has their own specific instructions and requirements which must be satisfied; however, in most cases, solicitors are reporting the ground rent clauses to the lender directly for confirmation that they are happy to proceed. Some lenders are refusing to lend in these instances because if the freeholder/landlord was able to obtain a possession order through the court, it doesn’t only leave you without your property but leaves the mortgagee without any security.

Leasehold properties could become increasingly more difficult to sell or mortgage unless statutory provisions are re-considered, or lease terms re-negotiated.