Doubling Ground Rent: Unpacking the problem for lenders

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In the last decade, it’s become very apparent that many developers have been creating properties with ground rents that are more oppressive than were typical historically.

Leaseholds are usually viewed as a type of ‘peppercorn’ rent, a fee so low that the freeholder typically doesn’t bother collecting it. However, ground rents are becoming much more significant of late – and often include doubling clauses.

Doubling ground rent is creating a bit of a perfect storm, and is causing lenders to reject these ‘onerous’ rents. In most scenarios, the properties are rendered unsellable.

The AST Issue

Since the introduction of the Housing Act in 1988 – which essentially gave us the Assured Shorthold Tenancy (AST) agreements that we know today – any ground rent in excess of £250 a year (or £1,000 in Greater London) is allowed to be classed as a Shorthold Tenancy Agreement.

As part of the agreement, the freeholder can serve notice on a lessor (i.e. the individual leasing or letting a property, such as a landlord) if just a couple of payments have been missed. For instance, if you as a lessor pay ground rent on a monthly basis, but two months go unpaid, they can then serve you notice and evict you.

The implications are significant, though you may not have your ground rent payment high on your list of priorities. If you are not aware of this and run into financial problems, you could find that you essentially lose your lease – which then returns to the freeholder – and, as a result, your home.

It is sobering to think that missing a couple of ground rent payments could lead to you losing your home in just a few months. As a result, lessors who have pushed ground rent payments way down on their list of priorities, and certainly below the mortgage payment, is making lenders very nervous indeed.

Doubling the Problem

The issue of doubling ground rents came about because the standard RPI (Retail Price Index) linked increases seem a bit ludicrous on a nine hundred and ninety-nine year lease. After all, it can be unclear if this metric will exist – if it doesn’t, the ground rent then falls in value to nothing when adjusted for inflation.

Instead, freeholders simply elected for doubling ground rents. In the past, doubling ground rent has occurred every twenty to thirty years. However, in the past decade it has become common for ground rents to double every ten or fifteen years. The BBC estimates around half of leaseholds are onerous in this way.

Reasons for doubling ground rent are largely commercial. Having built a development, the freeholder – usually the developer – can sell the freehold on for a significant sum. This is based on the vast potential of the freehold to earn money in the future, and is underwritten by the fact those who cannot afford to pay may end up forfeiting their property.

You can imagine the developer’s executives reaction to the vast sums of money this could provide, as well as the effects on bottom lines. Similarly, there are firms out there that are buying and holding freeholds as very long term investments.

In response, the government have proposed a ban on houses being sold as freeholds and are instead insisting on fixed or RPI linked ground rents. Unfortunately, this does nothing for the thousands of people who already own properties with doubling ground rent clauses built-in. Most lenders will not touch a property that has ‘onerous’ ground rents – that is where the ground rent is greater than 0.1% of the property (£300 on a £300,000 property for instance), or where the rent doubles any less than every twenty years.

Seeking Opportunities

For some, however, this ground rent scandal in-the-making could present opportunities. When a doubling ground rent is discovered, vendors will often be forced to sell at a discount as a result. Furthermore, if the buyer has sufficient capital to also acquire the freehold, they could instantly restore the value of the leasehold to market value.

There also might be an opportunity to effect a legal process called collective enfranchisement. This gives you the right to club together with other leaseholders to buy the freehold for a fair market price. This right was brought in by a 1993 law, boosted by the Commonhold and Leasehold Reform Act of 2002, yet remains fairly underused.

The Act states that you can buy the leasehold at a significant discount because of the onerous ground rent and buy the freehold at a fair price alongside other leaseholders. As long as the lease is over eighty years, this might not be as expensive as you think. The cost can be calculated using numerous leasehold calculators, which can be found here.

If you did wish to acquire the property with a mortgage, there are some lenders – not many, but a few – that will allow such onerous ground rents as long as there is an indemnity policy. Commonly called a New Forfeiture of Lease policy, these are put in place to protect the lender against legal costs and loss. Whilst these might be pricey, they may be worth considering for the opportunities and potential benefits that come with them.

Moving Forward?

From our perspective, this is surely a scandal about to blow. As people start the process of moving home, they may discover clauses that they were not aware of when they first bought the property – which then renders the property practically un-mortgageable for new buyers. As such, they will become prisoners in their own homes and may have to sue to overturn these leases.

Typically, lenders will accept anything under 0.1% of the value of the home – that doesn’t double less than twenty years – or is limited to an increase in line with the RPI. As unfortunate as this is, in some cases it might present opportunity. However, if freeholds can be bought solely or at least jointly with other leaseholders, this can restore the market value of the property.

These issues are complex and you should always seek advice from experts. If you find yourself in this situation, would like to buy property with onerous ground rent, or would like to discuss the potential opportunities outlined here, please get in touch with us on 0207 183 1101 to talk it through with confidence.

Picture of Author: Stuart Phillips

Author: Stuart Phillips

Fully CeMap qualified, Directly Authorised by the FCA and with over a decade of experience, Stuart has a wealth of experience in both specialist BTL and residential mortgages.

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