
When purchasing a Leasehold Property, you will usually be expected to pay an annual Ground Rent to the Landlord under the terms of the Lease.
Where the Ground Rent is over £250 (or £1,000 for London), the Lease will fall within the definition of an Assured Shorthold Tenancy (AST) under the Housing Act 1988, providing that the property is your main residence.
If a Lease is classed as an AST, the Landlord has the ability to apply to the court for a Possession Order if you have failed to pay the Ground Rent up to date and they can provide the necessary evidence of the arrears. This is a problem as the Lease is forfeited and would revert back to the Landlord. You would then lose your property and the lender would lose their security.
With most long leases the Landlord would have to serve notice on the Leaseholder if the rent was unpaid. This would allow time for the owner to clear the arrears before the Landlord initiated forfeiture proceedings.
This is a relatively new issue that has arisen in recent times. Traditionally, long leases only required a nominal amount of Ground Rent such as a peppercorn. The term ‘peppercorn rent’ means a nominal, symbolic rent amount and it is not intended to generate income for the landlord.
The introduction of the Leasehold Reform (Ground Rent) Act 2022 now means that Ground Rent in the new Leases (granted on or after 30 June 2022) is restricted to one peppercorn per year. The act only applies to new leases so will not change the terms of pre-existing ones.
Mortgage lenders
Lenders are now very concerned about this issue and some refuse to lend on these properties. Even if the mortgage term came to an end before the increase in Ground Rent, the lender may want to consider their ability to re-sell the property should there be a default on the mortgage payments and they repossess the property. Although the payment of the rent is within your control, not all Lenders are comfortable with the position.
It is also important to consider the Ground Rent review provisions contained within the Lease. It may be that £250 is affordable at the time of the purchase but as the Ground Rent increases in accordance with the Lease, future Ground Rent costs become too expensive to maintain. This may also deter future purchasers from buying the property.
Options
There are several options that may be available to resolve the issue. Including:
1. Amend the Lease to cap the Ground Rent at £250 (or £1,000 for London). The Landlord may agree to vary the terms of the Lease to cap the Ground Rent. However, they cannot be compelled to do so. If this issue is not resolved by parliament and the passing of further legislation, it is likely to be raised should you ever wish to sell the property in the future and so could affect its desirability and future value.
2. Request a Lease extension. Once you have owned the property for two years, in accordance with Leasehold Reform Housing and Urban Development Act 1993. The Ground Rent will then be extinguished thus negating the effect of the Housing Act. However, the cost of extending the Lease may prove to be quite high and even prohibitive.
3. Indemnity insurance. You may be able to take out an indemnity insurance policy on completion which would protect the lender in the event the Lease fell within the definition of an AST. However, not all lenders accept this option and an indemnity policy would not protect you. There is also a risk that when you sell the property in the future, the prospective buyer’s lender does not accept this option.
The options available will usually depend on the lender’s specific requirements and what the Landlord is prepared to accept. Every situation is unique.
The Government have committed themselves to reviewing Ground Rent provisions in the future. The Leasehold and Freehold Reform Bill was passing through the House of Commons prior to the election. However, this has now placed put on hold. The Act was going to potentially reform Ground Rent for existing Leases. Some of the possibilities being:
- No rent to be charged other than a peppercorn.
- Ground Rent would be restricted to the initial rent under the Lease.
- Ground Rent to be capped at £250 per year.
Until further Leasehold reform, the issue of increasing Ground Rent will still remain.
How Can Timms Help?
For more information, contact the Conveyancing Team on freephone 0800 011 6666 or via email at legal@timms-law.com.