Ground Rents – What you should know

High ground rents can be a real headache for buyers and sellers of leasehold residential property – even where the amount sounds very affordable.

In residential conveyancing we come across this problem fairly regularly – you’ve found a property you like, the lease has plenty of time still to run, and the ground rent doesn’t sound like much, but then we discover the lease is no more secure than a six-month tenancy agreement. How is that?

The problem is that a residential lease with a ground rent of more than £250 per year (or more than £1,000 in Greater London) is very likely to be treated as an Assured Shorthold Tenancy (AST) in law (there are a few exceptions). What this means in practice is that the landlord is able to bring the tenancy to an end for the same set of reasons as with a short tenancy.

It is true that a landlord will normally have the right to bring a lease to an end if the leaseholder does not pay rent for a period, but if the lease counts as an AST then the court may have no option to allow the tenant to pay – they must give possession to the landlord. This would be the case when rent is overdue by three months both when the landlord serves notice of possession proceedings and at the date of the court hearing,

As a result, many mortgage lenders are wary of offering a mortgage in these cases. Some may refuse to lend altogether, while others (including at time of writing Barclays, Santander, and TSB) will require an AST indemnity insurance policy. Such a policy would pay out to the lender if the lease was ended or lost value as a result of being an AST, but it would not prevent the lease being brought to an end.

Understandably then, buyers would do well to be cautious. Even if their mortgage lender is satisfied with indemnity insurance now future requirements could well be more demanding and they could still have trouble selling in years to come. Sellers meanwhile, will want to avoid the situation of not knowing if their buyer is able or willing to go ahead.

The most certain solution for now is to ask for the lease to be changed by Deed of Variation by the landlord. The landlord might agree to cap the ground rent at £250, or might specifically give up their rights to end the tenancy on the grounds reserved for ASTs – either would deal with the problem. Always get professional advice for changing the terms of your lease. You do not want to pay a lot for a deed that doesn’t solve the problem!

If you are a seller and know that this might be a problem for your property, it is almost certainly worth trying to change the lease now if your landlord will agree to it rather than wait until you have a buyer holding on, as the process can take many weeks.

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