What is a Ground Rent?

What is a Ground Rent?

So what is a ground rent? And why were they created? One of the most common ways of owning a flat, and occasionally houses, around England and Wales is with a long lease. In most cases when the property was built a long lease, of say 99 years, would have been issued including a specified annual ground rent.

Creating a new lease, setting a ground rent and review.
Ground rents are typically set when a property is first sold, or the lease is extended.

It is typically an amount set by the original developer or freeholder, if an informal lease extension has been completed, scheduled to be paid biannual on specific dates. When setting terms of the lease they choose payment terms, ie quarterly, semi-annually or yearly. As long as both sides agree and sign for it, you are will paying what is called a ground rent.

This amount to be paid is outlined in the lease and cannot be changed, unless agreed by both parties, until either the end of the lease, an agreed variation is made or a lease extension completion. Terms vary, some ground rents will be fixed and remain at the same price for the full juration lease whilst others will specify how and when the ground rent would increase.

Ground Rent Reviews:

Two examples of an increasing ground rent:

Increasing ground rents.
Over time, most, ground rents increase (as per terms in the lease).
  1. Doubling every 25 years.
    The first 25 years could be charged at £50 per annum (pa)
    Then the succeeding 25 years set at £100pa
    The next at £200pa, next £400pa, etc

  2. Increasing by the initial rent every 33 years.
    The first 33 years could be charged at £100pa
    Second 33 years, £200pa
    Another 33 years, £300pa.. etc
  3. A modern ground rent example would increase by the Retail Price Index (RPI), let’s use a 10 year review for the example (though as per the lease terms this could vary):
    The first 10 years charged at £200pa.

The second 10 years charged at £262.99, calculated by multiplying previous ground rent to the RPI between the previous date and now. Using Jan 2008 index of 209.89 and Jan 2018 of 276: Simply divide 276 / 209.89 x £200 ground rent = £262.99pa

Ground rents vary from lease to lease. Whilst there is no fixed formula when coming up with how much one property should cost, in 2017 Nationwide Building Society recommended they be set at 0.1% of the property’s value – recently the law commission has suggested a cap of £250pa.

How is Ground Rent Demanded?

The only one with the power to demand ground rent is the freeholders, or their instructed their property / asset manager. Leaseholders only need to pay when formally demanded, though arrears can be invoiced for up to the last 6 years. Freeholders will most likely send demand letters that will remind you of your due. Upon purchase of a new or old property, a leaseholder (or their solicitor) will have to inform the freeholder of a correspondence address. Where ground rent is minimal, or costly to collect, occasionally they do not charge or demand it.

Here are details that must be included in the Ground Rent demand letter, should you receive one:

Check list to ensuring ground rent and service charges are collected correctly.
Ground and service charge demands must be served correctly, else it may not be possible to collect.
  1. Name of the lessee.
  2. Time period covered by the demand letter.
  3. The specific amount to be paid.
  4. Include the name and address of the freeholder. In case your payments are to be made through managing firms or agents, then their names and addresses should be shown in the letter.
  5. The payment due date. In cases where the freeholder was not able to send letters on time, it should indicate the time the payment was supposed to be made.

Failing the above, the property’s lease will state when the ground rent should be paid – nonpayment can result in the freeholder making a claim in court, which could result in the lease being forfeited and property passed to the landlord or simply make it harder for the leaseholder to sell their flat or house in future. Claim for non-payment can only be filed if the total ground rent arrears are £350 or more and if you have been in arrears for three or more years.

When entering into a leasehold, one of the things you should consider when the time comes, is whether you should extend your lease or not. Choosing to continue with your lease, ground rents are no longer applicable. In the real estate jargon, they are termed as “peppercorn rent”. This simply signifies that you are no longer bound to pay your ground rent to a freeholder.

For all the things you need to know about ground rents and leasehold, it is best if you consult with experts. Contact our company, Sell My Ground Rents, and let us help you.

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