Buying a house is an incredibly exciting time, but it also has the potential to be an overwhelmingly stressful experience. To help you through the process, we’ve pulled together a series of articles that will guide you through the key areas of purchasing your property, and help you to make the right decisions.
In this fifth article of the series, we’re going to focus on leasehold property and the payment of ground rent that is usually payable to the landlord. Most residential flats are leasehold, and houses can be leasehold too, usually if they’re bought through a shared ownership scheme.
It’s important to point out from the outset that you will only own a leasehold property for a fixed period of time. When purchasing a leasehold property, a legal agreement will be put in place between you and the landlord (sometimes known as the ‘freeholder’) called a ‘lease’. The lease sets out how many years you’ll own the property, and other terms and conditions of the lease such as whether pet ownership is allowed, for instance. When the lease comes to an end, ownership of the property returns to the landlord.
The lease will also typically require you to pay an annual ground rent to the landlord who will usually own the freehold to the building, that is, the land the property sits on (we covered freehold in the previous article – 12 common steps of a freehold property purchase.
The fact that a residential long-term lease reserves an annual ground rent should not a problem as long as the annual amount is considered ‘fair and reasonable’.
Some leases will refer to what is known as a ‘peppercorn rent’, which means that you will not actually pay anything to the landlord other than a contribution towards the services provided by the landlord and a contribution towards the building’s insurance. However, it has been a common and widespread practice for more modern leases to introduce a ground rent starting at around £250 per year.
The problem with ground rent arises where a lease states that the amount payable is to increase periodically to what becomes an unreasonable amount. For example, it has not been uncommon for ground rents to double every 10, 15 or 20 years. While this sounds like a long period of time, to put this into perspective, we have seen estimates where a ground rent of £250 in 2017 could increase to as much at £8,000 by 2067, and more than £1 million by 2137 (120 years being the average term of a modern lease).
An increasing ground rent may also have implications on your ability to sell your property where the increases are considered unreasonable, or where the mechanism for calculating the increases do not comply with the lending criteria of mainstream lenders. This could also have adverse consequences on the value of your property when it comes to resale.
For many years, a doubling ground rent was considered by many mortgage lenders, solicitors and surveyors as acceptable. Mortgage lenders have traditionally been happy to lend on leasehold properties subject to a doubling ground rent, on the basis that the increases were fixed and the future amounts could easily be calculated, and therefore taken into consideration and budgeted.
Only in the last 12 months has the view of most mortgage lenders shifted, prompting a widespread change in the lending requirements. The view now is that any increases in ground rent should be in line with the Retail Price Index (RPI), as used to determine the rate of inflation. This would limit any future increases in ground rent to a ‘reasonable’ level, and this is currently considered acceptable to most mortgage lenders.
The amount of ground rent payable under a lease is also important for a variety of reasons. Non-payment of ground rent could entitle a landlord to sue for any arrears of the ground rent resulting in a County Court Judgement (CCJ). This would significantly hamper your ability to borrow in the future. In the very worst-case scenario, non-payment of ground rent could result in the landlord being granted a Court Order to obtain possession of your property – such a right will be set out in the terms of the lease.
Selecting the right solicitor to act on your behalf is a crucial decision in the house buying process, not least because they have the requisite knowledge to guide you through what can sometimes appear to be a complex and mystifying array of paperwork and terminology. There are numerous benefits of using a good, local solicitor to handle your case, including:
- Ability to use sound local knowledge.
- Convenience to make an appointment for a face-to-face chat if you need to.
- Speed to turn around the signing and return of documents
Next time, we’ll give you some useful tips on how to secure the right mortgage deal