Doubling Ground Rent Clauses – How to Fix Your Lease and other FAQs
What is ground rent?
The owner of a leasehold property is known as the ‘tenant’ who has the right to exclusively occupy that property for a period of time. The owner of the leasehold will often be required to pay a ground rent to their landlord. The term ‘ground rent’ is essentially a rent which is paid to the person who owns the ground that the property is built on. This should not be confused with the ‘service charge’ which is a sum to be paid to the landlord which covers their expenses in maintaining and providing services in the building for the benefit of the tenants.
What is a doubling ground rent clause?
A doubling ground rent clause is a clause in a lease which states that the ground rent payable by the tenant will double on fixed dates during the term of the lease.
For example, if a lease is for 125 years and contains a clause that states that the ground rent is initially £150 and doubles every 10 years, the ground rent that will be payable over the term of the lease will be:
For years 1 – 10 of the lease, ground rent will be £150 per year
- Years 11 – 20 – £300
- Years 21 – 30 – £600
- Years 31 – 40 – £1,200
- Years 41 – 50 – £2,400
- Years 51 – 60 – £4,800
- Years 61 – 70 – £9,600
- Years 71 – 80 – £19,200
- Years 81 – 90 – £38,400
- Years 91 – 100 – £76,800
- Years 101 – 110 – £153,600
- Years 111 – 120 – £307,200
- Years 121 – 125 – £614,400
Doubling ground rent clauses can reach extremely high levels by the end of the term of the lease. Using the example above, while an initial ground rent of £150 may seem reasonable, by the end of the term the leaseholder would need to pay £614,400 each year to the freeholder!
Why is a doubling ground rent clause a problem?
Doubling ground rents can rise to incredibly high levels over the term of a lease, which is likely to make the property unattractive to buyers and mortgage providers. Even where a doubling ground rent clause does not reach sums as high as the example above, the clause can still have an impact on the marketability and mortgageability of a property. If you are looking to purchase a property with a mortgage, your solicitor will need to advise your mortgage provider that there is a doubling ground rent clause in the lease. Mortgage providers are wary of lending on properties where the lease contains a doubling ground rent clause and you may find that the mortgage provider refuses to lend to you. It may be more difficult to sell a property with a doubling ground rent clause in the lease as buyers may have difficulty obtaining a mortgage, or may be concerned that they would not be able to resell the property in the future.
Another issue with doubling ground rent clauses is that where the ground rent in a long residential lease is over £250 (or £1,000 in London) the lease falls within the definition of an Assured Shorthold Tenancy (‘AST’). The main concern with this is that if the ground rent is unpaid for 21 days, the landlord will have a mandatory ground to repossess the property in accordance with the Housing Act 1985. This means that if the rent is unpaid for 3 months and the landlord makes a court application, the court must terminate the lease and give possession back to the landlord if they demonstrate that the tenant is in rental arrears. The court has no discretion to decide not to order possession on the grounds of unfairness or for any other reason. This is different to the ordinary right of forfeiture that a landlord would have under a lease that is not classified as an AST. Where a landlord makes an application for forfeiture and the lease is not an AST, the court may grant a tenant ‘relief from forfeiture’ – i.e. it does not have to order that the landlord obtain possession of the flat and the lease ends in circumstances where it would be unfair to do so.
I want to buy a property with a lease that contains a doubling ground rent clause – what should I do?
It is important that you consider your options before you purchase the property. The options you should consider include:
Ask the seller to agree with their landlord to amend the doubling ground rent clause to a fixed ground rent before completion. The landlord is likely to want a premium to be paid to him by way of compensation, as amending the clause will reduce the value in their freehold. However, you can ask the seller to bear this cost.
- If the seller cannot agree with the landlord to amend the clause, then you could consider asking the seller to serve a notice under Section 42 of the Leasehold Reform, Housing and Urban Development Act 1993, and assign this right to you on completion. This exercises a statutory right to obtain a lease extension, which will add 90 years to the lease and reduce the ground rent to a peppercorn (i.e. nil). If this option is taken, you should ensure that the price you pay for the property reflects the costs that you will incur in obtaining the lease extension after completion of the sale. It is important that the seller serves the notice before completion and assigns it to you, as this right can only be exercised by a tenant who has owned the property for a minimum of two years.
Our leasehold enfranchisement team are specialists in this area and can work with your conveyancing solicitor to ensure that you can amend the doubling ground rent clause after you have purchased the property.
I did not know about the doubling ground rent clause when I purchased the property and now I cannot sell/remortgage my property, what can I do?
It may be possible to come to an agreement with your landlord to amend the ground rent provision in your lease. It is likely that your landlord will want to receive a premium for this, as amending the ground rent provision will reduce the value of the freehold.
If you cannot come to an agreement with your landlord, once you have owned the property for a minimum of two years, you can exercise a statutory right to obtain a lease extension. The landlord will be required to add 90 years to the term of your lease, and the ground rent will be reduced to a peppercorn (i.e. nil).
You may be able to bring a claim for professional negligence against your solicitor if they failed to advise you on the impact of a doubling ground rent clause when you purchased the property.
If you would like to discuss any of these options in more detail, please get in touch with our leasehold enfranchisement team who would be happy to go over these options with you. They can also refer you to our professional negligence team.
My landlord has said they will replace a doubling ground rent with a ground rent linked to RPI. Should I agree to this?
Because of the controversy surrounding doubling ground rent clauses, some landlords offer to replace the doubling ground rent clause with a clause which states that ground rent increases with the Retail Price Index (‘RPI’). A few years ago, RPI ground rent clauses were considered to be the industry standard but I suspect that in the future these ground rents may also fall out of favour. Ground rent linked to RPI may result in a marginally lower ground rent than a doubling ground rent clause, but they are fraught with their own difficulties – the main one being the difficulty in calculating what the ground rent actually is every year!
It is also impossible to predict what the RPI will be in the future, so the clause does not provide you with any certainty in relation to ground rent. The Office of National Statistics has reported that RPI has lost its status as a National Statistic as it is not a good measure of inflation, and they no longer encourage its use. It is likely that a lease which contains a ground rent linked to RPI will be viewed unfavourably by mortgage providers, which will have a negative impact on the marketability of the property.
A better course of action would be to obtain a lease extension which will have the effect of reducing the ground rent to a peppercorn (i.e. nil) either by agreement with your landlord (if possible) or by exercising your statutory right to a lease extension.
Who should I contact at Mayo Wynne Baxter in relation to any of the issues above?