Escalating ground rents?

A recent Which? Report this month included a feature about escalating ground rents, but what’s all the fuss about?

Apartments are almost always sold on a leasehold basis, but a lot of developers these days are now selling houses on long leases, instead of selling the freehold, which is much more traditional. The lease can be for as long as 999 years and the owner pays what appears to be a fairly modest ground rent, annually to the developer.

The Which? Report has highlighted a problem about leasehold houses which has been developing over a number of years and which is now becoming a serious issue for some parts of the housing market.

The main problem is where the ground rent provision includes an escalator clause which effectively doubles the ground rent every 10 years or so. Which? gives an example of a ground rent that starts at £295 per year and when it doubles every 10 years, the amount payable in 50 years’ time will be an eye watering £9,440!

Well advised buyers are now thinking twice before agreeing to buy a property with such a clause in its lease, and mortgage companies will be reluctant, if not unwilling, to lend money on the security of this sort of lease. The impact of this is that sellers are struggling to sell their properties at their proper market value, and some buyers are seeing their mortgage offers revoked when escalating lease clauses are reported to the lenders.

The government has recently confirmed its plans to overhaul the leasehold system, although the main focus is to prevent these issues from arising for homebuyers in the future. This may not be much comfort for someone who has already bought a house with an escalating rent clause, but Which? are campaigning for a change in the law to protect homeowners and ensure that no one loses out. At least one responsible developer has expressed its willingness to vary some existing leases so that ground rents rise in line with inflation, rather than doubling periodically.

if you own a house which is held on a long lease, it is worth having a look at the rent review provisions of the lease, and if you have any concerns about this, contact one of our property lawyers for advice.

Published 20 September 2018

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