Escalating Ground Rents and the implications faced by Leaseholders

What is an escalating ground rent and why are escalating ground rents problematic?

Escalating ground rent clauses are provisions in a lease that enable the freeholder to review and amend the ground rent after a specified period of time has elapsed.

Historically ground rents were set at a ‘peppercorn rent’ however, during recent years ground rents have either typically been set at a higher initial rent at the commencement date (i.e. the date that the lease term is deemed to have begun) or the rent review periods set out within the provision of the lease have been shorter.

Leases with high and escalating ground rents can make it difficult for leaseholders to sell or re-mortgage their property. A lease where: (1) a ground rent is, or will be, in excess of £250 per annum (or £1000 for properties within London) and; (2) the property is the only principal resident of the leaseholder, is interpreted as being an Assured Shorthold Tenancy under the Housing Act 1988. For leaseholders, this means that the rules in respect of forfeiture - such as notifying a mortgagee of the arrears do not apply.

Ground for forfeiture is set out within Schedule 2 of the Housing Act 1988 of which there are 17 in total, all of which contain different notice periods. Ground 8 gives landlords power to serve notice on a tenant for non-payment of rent, if rent is three months in arrears. Ground 2 sets out remedies to a mortgagee’s right to claim possession.

Grounds 2 and 8, which a landlord or mortgage lender can rely upon for arrears, are mandatory grounds. Where a ground is mandatory, if evidence of reliance can be proven a court will have to issue an order for possession and a mortgagee would not be informed ahead of such an order being made. This would result in the mortgagee’s security being at risk.

Landlords must serve notice to leaseholders in a prescribed format setting out the grounds that the landlord is seeking to rely upon.

Under section 8 Housing Act 1988 a court has a wide discretion of power to grant relief from forfeiture if arrears are settled even after such time as an order for possession has already been made.   

What remedies are available to tenants?

The Leasehold Reform (Ground Rent) act 2022 came into force on the 30 June 2022, after such time ground rents in most new leases cannot legally be for anything more than a ‘one peppercorn per year’. In practice this ‘peppercorn rent’ means that no money can legally be charged and additionally managing agents will not be able to chase a fee for collecting a ground rent.

There are however, remedies available to a tenant with a lease created prior to the act which may increase saleability and mortgage-ability.

Indemnity polices for escalating ground rent are available which may satisfy a mortgage lenders requirement however, it is important to remember that this will offer no protection for a leaseholder themselves.

Undoubtedly a better option would be for a landlord and leaseholder to enter into a Deed of Variation to limit the ground rent to an acceptable threshold. A landlord is under no obligation to agree to enter into a Deed of Variation, however. If a landlord does agree to enter into a Deed of Variation it may be beneficial to also include a mortgagee protection clause. Where such clause is contained within a lease a landlord is required to inform a mortgagee of their intention to serve notice before notice is served, thereby allowing the mortgagee to step in before action is taken.

The ongoing problem for leaseholders

There are a number of leases which contain ground rents that have the potential to exceed acceptable limits and mortgage lenders may simply refuse to lend.

The requirements set out by mortgage lenders include the maximum starting ground rent or to not lend on leases which allow rent to be increased during a set number of years from the lease commencement date.

The issue of escalating ground rent coupled with leasehold properties losing value as the unexpired lease term become less, will result in leasehold properties becoming less attractive to potential purchasers.

Whilst discussions during consultations ahead of the Leasehold and Freehold Reform Act 2024 being passed included consultation to limit ground rent to zero on long leases ground rents were not abolished or limited which will have come as a major blow to leaseholders. Other proposed reforms not incorporated within the passed bill which would have arguably helped a leaseholders position included:-

• Strengthened measures to protect leaseholders from paying historic fire safety remediation costs;
• Regulation of property managing agents;
• Amendment to the non-residential limit for collective enfranchisement and the percentage of qualifying tenants required to participate in an enfranchisement claim. 

Key changes implemented within the act include:-

• Simplifying the cost and process for the right for tenants to acquire their freehold.  
• The sale of new houses with Leasehold Tenure will be banned in England and Wales.
• Standard lease extension terms will now increase to 990 years for both houses and flats.
• It will no longer be a requirement to own a property for a period of 2 years to become a qualifying leaseholder for a lease extension.

If your property is subject to an escalating ground rent – or you are considering purchasing a property where ground rent is payable – and require advice as to the implications of the same, then please do not hesitate to get in contact with John Hodge Solicitors.