Many freeholders are selling leasehold properties which are subject to unreasonable ground rent provisions. Landlords can only increase the ground rent if the lease contains a provision allowing them to do so. In some cases, such provision can create an unreasonable or excessive annual rent amount. What this sometimes means, is that suddenly your long lease is an Assured Shorthold Tenancy. So what does this mean?
What is an unreasonable ground rent increase?
Where the ground rent is £250 or more a year, buyers and lenders may class it as unfair and unreasonable. So why is this?
Leases with rent over £250 a year are automatically Assured Shorthold Tenancies. The level is higher in London, at £1,000 per year. There are some exceptions, including where the tenant does not live in the property as his main home, or if the tenant is a company.
How does this cause an issue?
This really only causes an issue if the resident tenant fails to pay his ground rent.
If the rent is below £250 a year and the tenant stops paying rent, a landlord would be able to recover possession of the property by forfeiting the lease. This is a complex legal procedure, and the lender will be named in the possession proceedings. The lender and the tenant will have the right to apply for relief from forfeiture if the court forfeits the lease.
Where the rent is over £250 a year, and therefore an assured shorthold tenancy, the landlord has another route to possession. If the tenant breaches the tenancy (including rent arrears), he can serve the tenant with a section 8 notice. If there are over three months’ arrears when the landlord serves the notice, issues proceedings and then gets to the court hearing, the court has no choice but to make an order for possession. This is all without the landlord having to inform the lender. At this point, the tenant can be evicted, losing their home, and the lender loses its security over the property.
I am buying a property with a ground rent increase provision, what should I do?
Your solicitor will report to you and your mortgage lender about a rent increase clause. This will ensure that you and your lender are aware of the risks and consequences should you fall into ground rent arrears during the term of the lease.
One option is to ask the landlord to cap the ground rent at £250. If agreed, this will be done by way of deed of variation.
It is important to be aware that if the landlord agrees to a deed of variation, it is highly likely that you will need to cover all the legal fees for this for both you and the landlord. Unfortunately, this process will contain additional work to the standard transaction and may delay the completion of your purchase.
If the landlord insists on keeping the ground rent provision as per the lease, the lender may require an indemnity policy. Depending on the terms of the policy obtained, an indemnity policy might include:
- The cost of defending or prosecuting any legal proceedings
- damages, compensation and costs awarded against you as a buyer by a court or tribunal and
- the expense of complying with any injunction
Your solicitor will advise you on the specific terms of any indemnity policy.
If you have found the perfect leasehold home, where the rent is (or could become) over £250 a year, you should not experience issues during the term of the lease. However, it is difficult to know whether you might encounter difficulty selling such a property in the future, and whether it might negatively affect the valuation. It is important to note that some lenders will not lend on such properties. Likewise, some buyers are not happy to pay such high rent amounts nor take that risk.
If you are considering purchasing a leasehold property with a rent increase provision, your solicitor will advise you on the best way to protect your position.
The Government has also pledged to “take action to address the loophold to ensure that leaseholders are not subject to unfair possession orders”. We will keep our blog updated on any further news on this.
Our residential property team are on hand to answer your queries about your ground rent. Alternatively, if your landord has started possession proceedings, please contact our property disputes team. Call us today on 0800 988 7756.