Doubling Ground Rents: A Growing Problem

A number of leasehold property owners are looking for compensation from their conveyancing solicitors due to a clause in their lease that causes ground rent to double at regular intervals. This practice, usually buried in the fine print of property contracts, is causing a number of issues for homeowners, particularly leaseholders. 

While this may not be overly burdensome when ground rent is low, it can become very costly when the annual ground rent is higher. For example, if a lease has a ground rent of £500 per year and this ground rent doubles every ten years, by the time a 99-year lease reaches its final nine years, the annual ground rent would be £256,000 per year. 

If you're unfamiliar with ground rents, you're not alone, many property owners are unaware of their long-term effects until it’s too late. In this article, we’ll explore what doubling ground rents are, how they can impact property owners, why it’s becoming an issue, and what steps homeowners can take to protect themselves.

What is Ground Rent?

Ground rent is a fee paid annually by a leaseholder to the freeholder (landowner) for the right to occupy a property built on their land. It is a common feature in leasehold agreements and is usually set out in the lease contract. The amount can be fixed or subject to increases over time, depending on the terms of the lease.

In most long-term lease agreements, the ground rent is reviewed at set intervals, commonly every 10, 25, or 50 years. In some cases, the ground rent is set to double at regular intervals, which is where the problem happens.

The Impact on Property Values

One of the most concerning effects of doubling ground rents is its impact on property values. When ground rents double, the value of a property can decrease quite a lot. This is true for leasehold properties with short leases remaining.

Potential buyers are often wary of properties with steep ground rent increases, particularly when they don’t know the full extent of the financial burden they may face in the future. This results in properties with excessive ground rent payments often being valued lower than comparable freehold properties or leaseholds with more reasonable ground rent terms.

In some cases, properties with doubling ground rents have become almost unsellable. Financial institutions, including banks and mortgage lenders, may be reluctant to offer mortgages for properties with escalating ground rent, particularly those where the payments will double shortly. This makes it harder for owners to sell, refinance, or remortgage their properties.

For example, Nationwide Building Society has stopped lending on leasehold homes that have punitive ground rent clauses, citing concerns over the potential for rising costs. 

What Does Ground Rent Pay For?

Ground rent is a fee paid annually by leaseholders to the freeholder of a property, but unlike service charges, it does not cover any specific services or maintenance. In most cases, ground rent is simply a contractual payment for the right to occupy the land the property is built. It doesn’t contribute to the upkeep of communal areas, insurance, or repairs, those costs are usually covered by separate service charges. Historically, ground rent was a nominal sum, but many new-build leases included doubling ground rent clauses, which have raised concerns about fairness and transparency, as leaseholders often receive no clear benefit in return for the payment.

The Leasehold Reform (Ground Rent) Act 2022

The Leasehold Reform (Ground Rent) Act 2022 was introduced in direct response to widespread concerns about unfair lease terms, particularly doubling ground rent clauses that left many leaseholders facing spiralling costs over time. While the Act does not apply retrospectively to existing leases with doubling ground rent clauses, it effectively bans the practice for new leases by capping ground rent at a symbolic "peppercorn" (zero financial value) per year. This change applies to most new long residential leases (over 21 years) granted after 30 June 2022 in England and Wales.

The Leasehold Reform (Ground Rent) Act 2022 is seen as the first stage in a wider reform of the leasehold system. Future legislation is expected to address broader issues, including giving leaseholders greater rights to buy their freehold and tackling unfair terms in existing leases.

Why Have Doubling Ground Rents Become More Common? 

So, how did we get to a point where doubling ground rents is so common? The practice stems from historical leasehold agreements, many of which were structured in ways that were favourable to freeholders. Ground rent clauses were included in leasehold contracts signed decades ago, often without the proper understanding of the long-term implications. These contracts were made in the interests of the landlord, who would receive large income increases over time, while leaseholders may not have anticipated the financial strain that could develop.

The increase in leasehold properties, particularly in urban areas, has led to even more leaseholders being affected by these clauses. Builders and developers sometimes offer properties with leasehold terms, including ground rent arrangements, to make them more affordable upfront. However, the hidden costs of these deals may not be revealed until years down the line, when leaseholders start to feel the effects of doubling rents.

What Can Homeowners Do About Doubling Ground Rent?

If you're a leaseholder facing the issue of doubling ground rents, there are steps you can take to mitigate the impact:

1. Check the Terms of Your Lease

The first step is to carefully review the terms of your lease agreement. It’s important to understand when and how your ground rent will increase. If you’re not sure, get advice from a solicitor who specialises in property law.

2. Consider Extending Your Lease

If your lease is nearing its expiration, or you’re concerned about the effects of doubling ground rent, extending your lease may be a worthwhile option. Extending the lease can help to reduce the impact of rising ground rents, as well as improve the value of your property.

3. Negotiating a Ground Rent Reduction

Some leaseholders have successfully negotiated with freeholders to reduce or eliminate the doubling clause in their leases. If your lease is subject to regular ground rent increases, you may be able to negotiate a more reasonable arrangement.

4. Consider Buying the Freehold

If you’re willing and able, buying the freehold of your property may allow you to remove ground rent. This can be an expensive option, but it may be a good investment if you want to take full control of your property’s terms and avoid escalating costs.

The Competition and Markets Authority

The Competition and Markets Authority (CMA) has taken a proactive stance against unfair ground rent practices, particularly those involving clauses that cause ground rent to double over time. In 2020, the CMA launched an investigation into the leasehold housing market, focusing on misleading practices by developers and freeholders. As a result, major housing developers agreed to remove doubling ground rent clauses from their contracts and replace them with fairer terms. The CMA found that these clauses could mislead buyers, lead to rising costs, and make it difficult for leaseholders to sell or remortgage their homes.

These enforcement actions have brought much-needed attention to the issue and offered relief to many leaseholders trapped in disadvantageous agreements. While the CMA cannot change all existing leases, its efforts have pressured developers and landlords to act more fairly, setting a precedent for future practices in the leasehold market. The CMA’s ongoing work supports the broader movement toward leasehold reform and provides hope for those still affected by onerous ground rent terms. 

The Future of Leasehold Ownership and Ground Rent

Understanding the terms of your lease, exploring options to extend or negotiate, and getting legal advice are all important steps in addressing the issue of increasing ground rent.  The introduction of the Leasehold Reform (Ground Rent) Act 2022 marked a big step towards fairer lease terms by banning ground rent for most new residential leases. 

However, campaigners and leaseholders are calling for further reforms to address existing leases still burdened by rising ground rent clauses. 

The government has highlighted its intention to go further with proposals to make it easier and cheaper for leaseholders to extend their leases or purchase their freehold, as well as plans to cap existing ground rents. While these reforms are not yet law, they represent a shift in political will and public awareness.

For leaseholders trapped in unfair contracts, this could mean more opportunities for redress and greater long-term stability. Staying informed and seeking specialist advice remains key as the leasehold landscape continues to evolve.

Expert Advice on Doubling Ground Rent

If you’re struggling with rising ground rent costs or need help understanding your lease agreement, our expert team at Bell Financial Solutions is here to help. We have access to a wide range of lenders and specialise in helping clients with complex leasehold arrangements, including those affected by doubling ground rents. Thanks to our experience in this area, we can match you with lenders who are more flexible and willing to work with a variety of lease terms. Contact us today for professional advice and support with understanding your leasehold challenges.

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