What is ground rent and when will ground rent be abolished?

Ground rent was historically a token sum of money that was fixed for the length of the lease or increased every 25 years, paid annually for occupying land. However in recent years this annual payment has been in the headlines, due to onerous ground rents that are too high or which increase too quickly. This is arguably the result of the monetisation of freeholds as an investment that provides a long term return, often packaged and sold to investors once construction of flats is complete. Note that there is no link between a service charge (payment for services) and ground rent (payment for effectively nothing).

If your ground rent is £10 a year and rises modestly every 25 years, there is no need to read on. If, however you have found yourself paying a ground rent of £250 a year or will shortly see your ground rent double or increase with RPI, you may need to look at the options to deal with this before selling or remortgaging. You may simply wish to simply to nip it in the bud before the ground rent escalates into an uncomfortable level.

What is a peppercorn ground rent?

A peppercorn rent is a legal term for nil, zero or nothing. It means the ground rent has been removed entirely but there are historic legal reasons for replacing a sum of money with a peppercorn, rather than saying 'no rent is payable under this lease'.

A peppercorn rent is what every leaseholder should strive for and this is what will be achieved by removing the ground rent via a statutory lease extension.

When is ground rent too high?

This will vary depending on whether the flat is in London or where property values are lower such as Brighton or Manchester, but an onerous ground rent is usually considered to be:

• more than 0.1% of the value of the flat

• doubling ground rent every 15 years

• RPI ground rent increasingly more frequently than every 10 years

• increased as a % of the flat value each time the flat is sold

• increasing by a fixed amount either too quickly or by too much (as in likely to make the annual sum more than 0.1% of the flat value

If you are wondering how people determine what is an isn't considered onerous, it is mainly led by mortgage companies. If a mortgage company will not lend against a leasehold flat, a buyer cannot proceed, and this is why an onerous ground rent sometimes only becomes an issue during the conveyancing process, as lenders tighten their requirements on this issue which wasn't previously a common problem.

Each mortgage company sets out what it considers an onerous ground rent to be in part 2 of the UK Finance Handbook, and you can check your mortgage companies requirements here by scrolling down to the 'lenders' handbook search'

What happens if I don't pay the ground rent?

Ultimately, there is likely to be a clause in the lease the entitles the landlord to forfeit the lease. In this scenario the mortgage debt would still need to be paid by the leaseholder who has lost the flat, and hence, forfeiture is a severe penalty.

This means the lease is extinguished and the flat reverts back to the freehold.

There are legal protections in place and a lease cannot be subject to forfeiture proceedings unless the sums owed exceeds £350. However it is often the costs incurred in bringing forfeiture proceedings and in serving a s.146 notice that is the real issue, as it is extremely rare for a residential lease to be forfeited but these costs will need to be paid in order to obtain relief from forfeiture.

Will ground rent affect a BTL property?

If you are looking at this from the perspective of a buy to let property, it is likely that the onerous annual payment is eating into your return on investment. You will also need to factor in the likely legal costs, valuation costs and premium that will at some stage be payable to the freeholder to reduce the rent to a peppercorn.

A further consideration may be the ability to refinance a portfolio that has properties subject to doubling ground rent, RPI ground rents or those linked to the open market value of the flat.

Should I buy a flat with ground rent over £250?

From reading this post it will be clear that there are greater risks for such properties however much will depend on how fast the ground rent rises i.e. 25 years is much more palatable than every 5 years. Equally, if the ground rent is roughly tracking 0.1% of property value, this may be seen as an acceptable level even if this exceeds the much talked about £250 figure.

Deed of variation

Something that leasehold solicitor Ricky Coleman, writer at Peppercorn Law in Brighton has become all to familiar with is "the common issue of a buyer of a flat being told that the lease will be extended by the seller before the flat is sold without then having a leasehold expert check the terms of that new lease that they will be subject to. The new leaseholder can end up on the hook for a very high ground rent, or one that double every 10 years for example. In either case, that flat will be difficult to sell without a lease extension being carried out to reduce the ground rent to a peppercorn, unfortunately at the new owners expense."

When will ground rent be abolished?

The Leasehold and Freehold Reform Act 2024 was enacted without abolishing existing ground rents and it seems unlikely that this will now happen, though it was an option that was looked at in the consultation process.

Instead, the 2024 Act contains a provision that proposes to cap the value of ground rents at 0.1% of the flat value when calculating the premium payable for collective enfranchisement or a lease extension; note that secondary legislation is still needed to bring in these changes, and a consultation on lease extension valuations is due in the summer of 2025.

There is a also a little talked about new right for leaseholders to remove ground rent by deed of variation on payment to the freeholder, available to those with more than 150 years remaining on the lease, though this also needs to be brought in by secondary legislation

For now, it is clear that existing leaseholders should keep an eye on further announcements from the government and consider taking advice from a leasehold solicitor on their specific circumstances if grappling with an onerous ground rent. It is also clear that commonhold will shortly become the new legal structure for flat ownership and you can read more about commonhold here.