If you buy a leasehold property, you are likely to have to pay ground rent. But what is ground rent and how much does it cost?
It’s a legal term that describes payments made from a holder of a leasehold property to their freeholder. To understand the specific terms that relate to your property transaction you will need a good solicitor, but we break it down to help explain the basics.
What’s the difference between freehold and leasehold?
Properties in the UK are either freehold or leasehold. If you own a freehold property in England or Wales, you own your home plus the land it stands on. But if you own a leasehold property, you are effectively renting it on a ‘long lease’ from the freeholder. In return, you will pay the freeholder an annual ground rent.
Almost all flats are leasehold. Most, but not all, houses are freehold although some new build houses completed in the past 10 to 15 years are leasehold.
There are different systems in Scotland and Northern Ireland.
How much does ground rent cost?
This varies from property to property. For some homes, it will be as little as £1 or £10 a year, which is often referred to as ‘peppercorn’ rent. But for other homes, ground rent could be several hundred pounds a year.
Each leasehold property comes with a lease. This is a set of terms and conditions outlining what you can and can’t do to your property how much the ground rent is and any mechanism for it to increase. Some ground rents go up every 10, 25 or 30 years. The rise might be a monetary value, a percentage (100% in many cases), or in line with inflation.
Who do you pay it to?
These are payable to the freeholder (or landlord) of your building. This might be a company or an individual. Some freeholders hire managing agents to collect this for them and you don’t have to pay unless the freeholder has formally demanded it.
Any demands must be in writing and include details such as the period it covers when it is due, and the freeholder’s name and address.
What happens if you don’t pay?
If you don’t pay when it’s due, the freeholder can take you to court to recover the debt.
In extreme cases the freeholder could commence forfeiture proceedings against you – if they succeed, you will lose possession of your home. However, this is very rare.
How does a lease extension affect ground rent?
Most leaseholders have a statutory right to extend their lease under the Leasehold Reform Act 1993. If you extend your lease via the formal route set out by the act, you will have 90 years (50 years for houses) added to the length of your unexpired lease and the ground rent reverts to zero.
Why has ground rent been controversial?
The past decade or so has seen homebuilders look to make large sums of money from ground rent. They do this by including onerous ground rent terms into leases. In the worst cases, the ground rent doubles every 10 years. An initial ground rent of £250 a year, doubling every decade, would rise to £8,000 a year in 50 years’ time. Even with inflation, this would be unaffordable to many leaseholders.
Many buyers have reported not being alerted to these lease clauses either by the builder or their conveyancing solicitor!
The same time period saw many houses sold as leasehold, rather than freehold, for no other reason than to provide the freeholder with a revenue stream from ground rents. The freeholds of many houses and blocks of flats were routinely sold to investment companies attracted by the revenue stream.
Have the rules changed?
The Leasehold Reform (Ground Rent) Bill is currently making its way through parliament. When it becomes law, the bill will put an end to ground rents for most new-build leasehold properties in England and Wales.
However, these new rules will only apply to new leases that are granted after the legislation comes into force, and won’t affect existing leases.
Last Updated: October 26th, 2022
