Ground Rent Doubling

Ground rent is nothing new, paying the land owner a fee each year to occupy what is essentially their land seems reasonable and these costs are generally low.

Recently however greedy property developers saw an opportunity to squeeze even more cash from their projects and started not only selling new builds as leaseholds but including clauses that can cause the ground rent to increase exponentially over time.

In many cases this went unnoticed at the time of purchase and now tens of thousands of homeowners have been left with a problem.

The guru investigates doubling ground rent and its potential solutions, read on to find out what he found.

What is doubling ground rent

Doubling ground rent is one of those “does what it says on the tin” type of deals. The ground rent paid by the leaseholder, with is usually a modest sum paid every year to the landowner, doubles after a certain period of time due to a clause in the lease often referred to as a doubling ground rent clause.

“rent paid under the terms of a lease by the owner of a building to the owner of the land on which it is built.” – definition of ground rent

This means that the sum paid increases in multiples of 2 each time a certain period of time passes. This period of time is commonly 10 years but could be other periods such as 15, 20 or 25 years.

The problem with having a doubling ground rent clause

A doubling ground rent cause can make the annual cost that you have to pay phenomenally high over the term of the lease.

For example if you started with a modest ground rent of £200 on a 99 year lease the increase in ground rent over that period would look like this;

Lease Years
1 – 10
11 – 20
21 – 30
31 – 40
41 – 50
51 – 60
61 – 70
71 – 80
81 – 90
91 – 99

Ground Rent Cost
£200
£400
£800
£1,600
£3,200
£6,400
£12,800
£25,600
£51,200
£102,400

Now while it is unusual for someone to live in a property for the full term of a lease, chances are at some point you will want to sell and move into a different property and this is where the trouble comes in.

The doubling ground rent clause makes the leasehold very unappealing to buyers. Even if you can find one willing to take on the doubling ground rent clause they will find it next to impossible to get a mortgage. Most lenders won’t take the risk of lending on a property where there is a doubling ground rent clause in place due to 2 main factors;

Affordability – once the ground rent reaches such a level that the leaseholder will have to fork out thousands of pounds per year before they have even paid a penny towards their mortgage lenders are rightly pessimistic about the ability of the leaseholder being able to sustain these costs over a long period of time. With the average length of a mortgage term coming in at over 20 years there could be 2 price hikes during that time each time increasing the financial pressure on the leaseholder making being able to keep up with their mortgage payments less and less likely.
The housing act 1985 – this is actually the biggest concern for lenders. Once the ground rent increases beyond £250 (or £1000 in London) the lease becomes what is known as an “Assured Shorthold Tenancy” (AST). This means that is the ground rent unpaid for 21 days the landlord has the right to repossess the property with the leaseholder being unable to apply for relief as is the case when it is not categorised as an AST . This is a huge risk factor for lenders who would be left seriously out of pocket if the property was repossessed by the landlord, since the debt is secured against the property which the leaseholder is no longer the owner of.

Legislation to stop doubling ground rent

Recognising the growing problem of increasing ground rents based on a calculated method, including doubling ground rent, the government set out to introduce legislation to curb the issue leading to the leasehold reform (ground rent) act 2022.

The Leasehold reform (ground rent) act 2022

Coming into force on 30 June 2022 the Leasehold Reform (ground rent) Act 2022 commits the ground rent of new leases created after 1st April 2023 to be zero applying to leases of longer than 21 years and sets out financial penalties for non compliance up to £30,000 if a Landlord is found in breach of the legislation.

This applies to residential and retirement properties. However this legislation only applies to new leases and is not retrospectively applied to existing leases.

While this is good news for new leases, what is being done about existing leases? Well the Competition and Markets Authority (CMA) which has declared the doubling ground rent “unjust and unwarranted” has been working to commit developers and the companies who bought the freeholders. After an official investigation in 2019 many businesses have given formal commitment to remove the doubling ground rent clause from their leases and thousands of homeowners have received compensation.

What can you do about doubling ground rent

If you have not been one of the fortunate homeowners to have benefitted from the CMA action or new legislation you still have solutions to the doubling ground rent problem.

Deed of Variation

In essence a deed of variation is a contract outlining changes to the terms of a lease. If you have a doubling ground rent clause as part of your lease you can approach the freeholder and request a deed of variation to get it removed.

To get a deed of variation requires agreement from both the leaseholder and the freeholder, in this instance both parties would have to agree to the removal or amendment of the doubling ground rent clause.

There will be costs involved in this, at the very least the legal fees for the change will fall on the leaseholder. Additionally a freeholder might demand further financial compensation for the loss that they will incur from the reduction in ground rent that they will receive. This amount will often be determined by a surveyor which will also be a cost that the leaseholder is liable for.

Statutory Lease Extension

Perhaps the simplest solution to the problem is to apply for a statutory lease extension. If you have lived in the property for more than 2 years you have the right to increase the lease by an additional 90 years.

Now you might be thinking that you have plenty of time left on the lease so what has this got to do with doubling ground rent. The granting of a lease extension also has the added benefit of reducing the ground rent to a “peppercorn” rent for the duration of the new lease so essential you are getting 2 things for the price of one, a longer lease term and a reduction in ground rent. Of course there are costs involved in this. As with the deed of variation landlords will require compensation for the amount that they would have made on additional ground rent and again the leaseholder is liable for the costs such as legal fees and surveyor fees if once is required to determine the value of the lease extension.

“A very low or nominal rent” – definition of peppercorn rent

In cases where the time remaining on the lease is below 80 years, the lease becomes classified as what is known as a “short lease’ if this is the case then the costs of extending the lease can increase significantly. Read our article on short leases to find out more on this matter.

Further Reading: Selling a flat with a short lease

Conveyancing solicitor failed to mention doubling ground rent clause

You may be able to pursue a professional negligence claim if at the time of purchase your conveyancer failed to mention the doubling ground rent clause. Solicitors are required to identify and disclose such clauses in the lease. They are also under a duty to inform the mortgage lender of any arduous ground rent increases that may be deemed unreasonable as per the mortgage lenders handbook.

Can you sell a leasehold that has increasing ground rent

You can sell a leasehold property that has a doubling ground rent clause. Although it may be significantly more difficult than selling a freehold property or leasehold without a doubling ground rent clause.

This is due to the fact that many buyers will be put off by the exponentially rising cost of the ground rent coupled with the fact that mortgage lenders are unlikely to lend against the property with the clause in place.

This can lead to a significantly longer sale time making an open market sale unviable for many.

Selling your leasehold property fast

Can you afford to wait for your leasehold property to sell?

By far the fastest and most certain way to sell your house or flat is through a house buying service.

Also known as cash house buyers these ‘quick sale’ companies will buy your house, regardless of condition and can complete the sale in a few weeks.

Speed is the obvious main benefit of this service, compared to a traditional sale which can take months, but there are also other benefits;

Having a guaranteed sale with a set timeframe frees you from the burden of uncertainty, knowing that your house is sold gives you the peace of mind to plan your future with confidence.
There are no costs to pay. All other methods of selling your house come with their own costs that you will need to pay out of your own pocket at some point. With a house buying service all of the costs are covered in the sale price so you never have to pay a penny.

Of course there is a drawback and that is the sale price. The trade off for a fast sale is having to accept a lower offer. If there are no major issues with the property this price will be around 80% of what your property would sell for on the open market in around 6 months.

So although the proverb “you can’t buy time” turns out to be false, it does come at a cost. However when you factor in the sales and holding costs of a traditional house sale it might not be as costly as you first think.

So, if you need to get moving fast, is the price really too much to pay?

The problem is actually choosing the right company to use. Unlike other areas of property sales, such as estate agents, the quick sale sector isn’t regulated so there are many rogue operators in the market looking to take you for a ride. These bad eggs are not easy to spot, on the face of it they look the same as the reputable companies, they say the same things and even have large marketing budgets to make it seem like they are the real deal.

So if finding the right company is like trying to find a needle in a large pile of needles, how do you go about choosing the best house buying company to use?

You could spend hours of your life doing diligent research on each and every one of the hundreds of companies out there, but do you really have time for that?

Fortunately the Cash house buyer guru has dedicated his life to separating the wheat from the chaff, fanatically investigating dozens of house buying companies and analysing their practices so you can make an informed decision. You can find the list of top rated house buyers by clicking the button below.

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FAQ’s

Can Ground Rent Double Indefinitely?

Essentially yes, or at least the ground rent can double at the intervals outlined in the lease (generally every 10, 15 or 20 years) for the entirety of the lease term.

So if you have 125 years remaining on the lease the ground rent will double at the stated interval for the full 125 years.

Is the government going to control doubling ground rent?

Yes. The government has already passed legislation that means for residential and retirement properties with a lease of 21 years or longer freeholders can only charge “peppercorn” ground rent which is essentially nil. However this only applies for new leases (created after April 2023).

Is it normal for ground rent to double every 25 years?

No. It is not normal for the ground rent to double every 25 years. Doubling ground rent only became a popular mechanism with property developers fairly recently and has since been legislated against.