Doubling ground rents and why they are such a problem

Doubling Ground Rent Clauses: How to Address the Issue and Other FAQs

What is Ground Rent?

When you own a leasehold property, you are considered the ‘tenant,’ with the right to exclusively occupy that property for a set period. As a leaseholder, you may be required to pay ground rent to the landlord, who owns the land on which your property is built. Ground rent is distinct from a service charge, which covers the landlord’s costs for maintaining the building and providing services that benefit tenants.

What is a Doubling Ground Rent Clause?

A doubling ground rent clause is a provision in a lease that causes the ground rent to double at regular intervals during the lease term. For instance, if your lease is 125 years long and starts with a ground rent of £150, which doubles every 10 years, the amounts due would escalate significantly:

- Years 1–10: £150 per year

- Years 11–20: £300 per year

- Years 21–30: £600 per year

- Years 31–40: £1,200 per year

- Years 41–50: £2,400 per year

- Years 51–60: £4,800 per year

- Years 61–70: £9,600 per year

- Years 71–80: £19,200 per year

- Years 81–90: £38,400 per year

- Years 91–100: £76,800 per year

- Years 101–110: £153,600 per year

- Years 111–120: £307,200 per year

- Years 121–125: £614,400 per year

As this example shows, what might start as a reasonable ground rent can become an exorbitant financial burden by the end of the lease.

Why is a Doubling Ground Rent Clause Problematic?

Doubling ground rent can lead to unsustainable payment amounts, making your property less attractive to both buyers and mortgage lenders. Even if the rent does not reach the extreme levels outlined in the example above, the clause alone can still affect your property’s marketability and financing options. Mortgage providers are often reluctant to lend on properties with doubling ground rent clauses, which can complicate or even prevent the sale of your property.

Additionally, if the ground rent exceeds £250 (£1,000 in London), your lease may be classified as an Assured Shorthold Tenancy (AST). Under an AST, if rent is unpaid for just 21 days, your landlord has a mandatory right to repossess the property, with no discretion for the court to intervene on grounds of fairness.

What Should I Do If I Want to Buy a Property with a Doubling Ground Rent Clause?

Before purchasing a property with a doubling ground rent clause, consider the following options:

1. Negotiate with the Seller: Request that the seller arranges with the landlord to amend the clause to a fixed ground rent before completion. This may involve paying a premium to the landlord, which you could ask the seller to cover.

2. Serve a Section 42 Notice: Ask the seller to serve a notice under the Leasehold Reform, Housing and Urban Development Act 1993 before completion, which you can then take over. This notice initiates a statutory lease extension that adds 90 years to the lease and reduces the ground rent to a peppercorn (nil). Ensure that the purchase price reflects the cost of this lease extension.

Your leasehold solicitor will be able to assist, working closely with your conveyancing solicitor to help amend or extend your lease after purchase.

What If I Already Own a Property with a Doubling Ground Rent Clause?

If you’ve already purchased a property with a doubling ground rent clause and are facing difficulties selling or remortgaging, consider the following:

1. Negotiate with Your Landlord: You may be able to reach an agreement to amend the ground rent clause, though the landlord will likely request a premium.

2. Statutory Lease Extension: After owning the property for at least two years, you have the right to request a lease extension, which will add 90 years to your lease term and reduce the ground rent to nil.

3. Professional Negligence Claim: If your solicitor failed to advise you about the clause when you purchased the property, you might have grounds for a negligence claim.

Your lawyer can guide you through these options, as each case will be different.

Should I Agree to Replace a Doubling Ground Rent Clause with RPI-Linked Ground Rent?

In light of the growing controversy around doubling ground rent clauses, some landlords may offer to replace them with clauses that link ground rent increases to the Retail Price Index (RPI).

While this may result in slightly lower rent increases, RPI-linked ground rent comes with its own set of challenges, such as the difficulty of calculating future payments and the unpredictability of inflation.

RPI is no longer recognised as a reliable measure of inflation, and leases with RPI-linked ground rent may also be viewed unfavourably by mortgage lenders, potentially affecting your property’s marketability. This has unfortunately followed years of leasehold advisors, surveyors and conveyancers accepting RPI as a safe ground rent benchmark, erroneously relying on past performance of the index to predict the future.

A more secure solution is to seek a lease extension that reduces ground rent to nil and does away with escalating ground rent issues once and for all.