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How does ground rent affect my purchase?

What is ground rent?

Ground rent is a fixed amount of rent paid each year to a land owner for the right to occupy a property, usually a flat.

How much is it?

The level of ground rent is determined by the terms of the lease. It can be a peppercorn (i.e. nothing) or any amount set by the landlord.

Does the ground rent level stay the same forever?

It depends on the terms of the lease, but usually no. Most leases contain provisions allowing for the ground rent to increase either (1) by a fixed amount at certain specific periods or (2) in line with an index such at the Retail Price Index.

Why is it so important?

High starting ground rents or ground rents that will escalate to high levels, and in particular, doubling ground rents contained in long leases, make it more difficult to obtain mortgage finance. This is because many UK lenders are reluctant to lend where the leases contain unreasonably high levels of ground rent. Some lenders will outright refuse to lend to you where the lease contains doubling ground rent provisions.

Is there a maximum level of ground rent over which lenders will not lend?

No. Every Lender has different criteria and that criteria is always changing. Your solicitor will have to disclose the ground rent to the lender prior to requesting your loan funds to come through. In short, your Lender will have to ensure they are comfortable with the existing provisions.  However, one must also always consider the 1988 Housing Act.

What does the Housing Act say?

Although a rather ‘historic’ piece of UK legislation, this states that when the ground rent exceeds £250 (outside of London) or £1,000 (inside of London), then the lease becomes an assured tenancy. This gives the landlord enhanced rights to take back the property from the owner in certain specific circumstances without any compensation to the owner.

What can you do about that?

The best thing to do would be to ask the landlord to amend the lease so that the ground rent can never rise about the limit in the Housing Act 1988. This removes the risk of the lease falling foul of the provisions of the Housing Act.

What if the landlord won’t agree?

Ground rents have a value and landlords do not want them to be restricted. If they do not agree to amend the lease, the only other option is indemnity insurance.

Is that expensive and easily available?

Prices are competitive readily available. Although you will need a ‘bespoke’ policy if you are buying a brand-new property direct from a developer. This is because ‘off-the-shelf’ indemnity policies contain criteria that may be impossible to satisfy.

So, if you are buying a new-build or a second-hand property and will have to pay ground rent, you must always review the ground rent provisions carefully and thoroughly.

For more information, please contact me on +44 (0)20 7201 1879 or via email: GuyFernback@childandchild.co.uk.

Posted By Guy Fernback

16 October 2020

Guy Fernback
Partner, Head of New Build