09 March 2021 #Commercial Real Estate
Originally, it was rent that was supposed to reflect only the value of the ground that was being let, ignoring any building on it. The term is now frequently used to mean a low or nominal rent, usually one paid under a long lease that was granted in return for a premium. The landlord gets a capital sum for the lease, so there is no reason for the tenant to pay a full market rent for the property as well. Often, the ground rent is simply a convenient figure, and has little bearing on the value of the land.
What is a doubling Ground Rent?
Doubling ground rent is where the lease has a provision for the rent to double after a fixed period. The lease would state a fixed amount, i.e. £250.00 and also include ‘such sum to double on anniversary of twenty fifth year’.
At first glance, they may not seem like much of an increase, but overtime the amount could be astronomical. Please see example below:
Initial ground rent - £250.00
Year 25 – 50 - £500.00
Year 51 – 75 - £1000.00
Year 76 – 100 - £2000.00
Year 101 – 125 - £4000.00
Year 126 – 150 - £8000.00
Year 151 – 175 - £16,000.00
Year 176 – 200 - £32,000.00
What is the problem?
This can have a significant impact if you come to finance the property or sell it. Since the introduction of the Housing Act in 1988 (that essentially gave us the Assured Shorthold Tenancy (AST) agreements that we know today) any ground rent in excess of £250 a year (or £1,000 in Greater London) is allowed to be classed as a Shorthold Tenancy Agreement.
Now, this would mean that the freehold owner would have significant rights over the leasehold owner if they failed to comply with their obligations under the lease. More specifically, if the leasehold owner failed to pay the ground rent for a period of 21 days, the freehold owner would have a right to re-enter the property and repossess.
You can see why lenders’ would not want to open themselves up to this risk and this is why many lenders refuse to lend if the lease has a doubling ground rent provision.
What are the Government doing to tackle this?
On 21 December 2017, Sajid Javid, the then Secretary of State for the Department for Communities and Local Government, announced new measures aimed at stopping unfair practices within the residential leasehold market. This announcement is in response to the Government's consultation in the summer of this year.
The Government are focusing on bringing in new legislation that set ground rents on new long leases, for both houses and flats to zero (save in the case of shared ownership leases). The Government are also, taking action to address the loophole created by the fact that long leaseholders with ground rents exceeding £250 per annum, or £1,000 per annum in London, may be assured tenants and to ensure that long leaseholders are not therefore subject to unfair possession orders.
In July 2019, the Government’s response to the Housing, Communities and Local Government Select Committee report on Leasehold Reform; released their plans on how they attempt to tackle this issue. The select committee reported that ‘there is no reason why the majority of residential buildings could not be held in commonhold, free from ground rents, lease extensions, and with much greater control for residents over service charges and major works’.
In January 2021 certain measures released by The Ministry of Housing, Communities & Local Government were revealed as part of the biggest reforms to English property law for 40 years, fundamentally making home ownership fairer and more secure. Legislation will be brought forward to set future ground rents to zero.
If you have a lease that has a doubling ground rent provision or looking to purchase a lease that may have this provision, please speak to our specialist Real Estate team who will be happy to assist you.