On 13 May 2021 the Leasehold Reform (Ground Rent) Bill was published by the government.
The proposed law was drawn up to reform the law surrounding leasehold properties and specifically the issue of onerous ground rent clauses.
If the bill becomes law, it will ban freeholders from charging ground rent to leaseholders in some new leasehold agreements, such as newly built residential properties.
If you are not familiar with the term ‘Ground Rent’, this is a charge contained within a lease that is payable by the leaseholder to the freeholder. Ground rent clauses have become particularly controversial over the last number of years when developers included onerous ground rent clauses in their leases. Often buyers did not understand or appreciate the long-term financial implications of such clauses. A huge number of leaseholders have been affected by onerous ground rent and most recently claimants took action in the case of Arnold v Britton and others heard by the Supreme Court.
Some ground rent charges may start at a small amount, such as £250 per annum. Leases historically doubled the ground rent every 20 years to reflect rising inflation. However, newer developments have included clauses that see ground rents double every 10 years. Whilst this may not seem to significant, the implications of this shorter doubling clause can be profound- it will cause the charge to rise exponentially.
A short example of this is when a Lease has 999 years left unexpired with a starting ground rent of £250 per year. If this amount doubles every 10 years, the leaseholder would be expected to pay £16,000 per year after 60 years, £32,000 per year after 70 years and a whopping £256,000 per year after 100 years.
Whilst 100 years is obviously a long way off, the reality for current owners is that if ground rent rises to these amounts in the future, this prospect will affect the value of a property today. The value of any asset to some extent depends on its value in the future – if the future value is £0, because the ground rent is extortionately high, the current value may also be worthless unless the clauses are changed.
Buyers’ conveyancers or solicitors are known to have failed to advise their clients of onerous ground rent clauses contained within a lease and the financial implications of the term.
As well as potentially having to pay an extortionate amount for ground rent over a number of years, a leaseholder with an onerous ground rent clause in their lease may also experience difficulty when selling their property in the future. This is because a competent solicitor should advise a prospective buyer of an onerous ground rent clause, and in addition, some lenders may not lend to buyers with onerous ground rent terms.
If a lease does contain an onerous ground rent term, it is the conveyancers or solicitors’ duty to bring it to the attention of their client, advise on the implications, and if possible, suggest means of reducing the ground rent term such as by entering into a Deed of Variation with the freeholder. A buyer may be able to agree a ‘peppercorn’ rent (taking the ground rent to nil) or an RPI increasing clause, which are generally more accepted by lenders.
Advising on ground rent clauses has become particularly important in recent years as banks have refused entirely to lend on a property with an onerous ground rent clause.
Therefore, the proposed bill is excellent news for leaseholders looking to enter into new leasehold agreements for newbuild properties. However, the law (if granted) will not be retrospective and therefore it will not help the 4.5 million leaseholders in England and Wales who are already in leasehold agreements and therefore still liable of ground rent costs.
If you are a leaseholder who has found themselves in the unfortunate position of paying an extortionate ground rent term, or if you have a ground rent term which will cause you to pay an extortionate amount in the future, you may be able to pursue a professional negligence claim against the conveyancer or solicitor who failed to advise you of the clause when purchasing your property.
