Expert View: What do you need to know about ground rent?

Craig Rennie, HRJ Foreman Laws

Craig Rennie, HRJ Foreman Laws - Credit: Archant

Recent reports in the national press have revealed that developers are selling an increasing amount of leasehold houses with escalating ground rent provisions which can increase the cost of purchasing the freehold in the future. In turn this can make the property difficult to sell or mortgage.

It is essential you are well informed about any leasehold house purchase you are considering.

What is a ground rent?

If you have a residential lease you will usually pay a ground rent to your landlord. Generally the ground rent provisions will be fixed or escalating.

A fixed ground rent will stay the same over the course of the lease. An escalating ground rent will increase during the term of the lease such as increasing with RPI or increasing by fixed amounts at regular intervals.

What is the problem?

If a landlord wishes to sell a block of flats to a third party the leaseholders must be given the opportunity to collectively purchase the freehold on the same terms. The same legislation does not apply to a block of houses. A landlord is therefore able to sell the freehold of a block of houses without offering the leaseholders the chance to collectively purchase.

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A third party purchaser will rely on the terms of the lease when calculating the value of the freehold. A ground rent escalator clause is likely to increase the cost of purchasing the freehold. As a result, many leaseholders have complained that the price they were quoted to purchase their freehold in the future, compared to the price quoted at the time of purchase, has dramatically increased.

What should I consider before purchasing a leasehold house?

• Ask the developer why they are not selling the freehold to you. There can be geographical reasons. For example, in Letchworth Garden City the freehold is owned by the Letchworth Garden City Heritage Foundation. A long lease is granted to the developer who then grants underleases of the individual units.

• Choose your own independent solicitor and ask them to review the ground rent provisions in the lease. Do not rely solely on the information provided by the developer or the agent.

• Take a long term view. Consider the ground rent review provisions during the duration of the entire lease and not just during your period of ownership. You may wish to sell in the future and the ground rent provisions will be a key consideration for a buyer and their lender in the future.

• Ask a surveyor for a specialist valuation to assess the likely premium of purchasing the freehold in two years’ time. The surveyor will review the rent review provisions in the lease and provide you with a calculation of the premium.

For advice, contact us today on:

Tel: 01462 458711