The Dangers of Escalating Ground Rent when purchasing a Leasehold Property
Owners of Leasehold Properties will often pay an annual ground rent to the person who owns the freehold of the property. This sum is payable in addition to the initial purchase price of a leasehold property.
The amount of the annual rent will vary from lease to lease. Historically, ground rents were fixed at a very low rate and often just a peppercorn or a nominal £1.
Careful consideration needs to be given to the amount of ground rent payable, and the frequency and method for increasing ground rents as these factors can all affect the value of a property and the premium payable to extend the length of the lease.
During the last ten years, higher ground rents have been introduced along with escalation clauses which cause ground rents to rise sharply over a period of time and in many cases have escalated to thousands of pounds causing financial distress to leaseholders.
Where ground rent exceeds £250 per annum (£1000 per annum in London) a lease may, through the provisions of the Housing Act 1988, be classed as an assured shorthold tenancy (AST).
If the lease is classed as an AST, the leaseholder becomes vulnerable to a mandatory Ground 8 possession order if the ground rent falls into arrears for three months. A court will be obliged to grant the landlord a possession order. This means that not only does a leaseholder face losing their home, they will also forfeit any purchase price paid at the time of buying their property.
Escalating ground rents within leases can have a detrimental effect on both the mortgage-ability and saleability of properties in the current market.
When buying a leasehold property, you should ask your solicitor to advise you on the ground rent provisions.