How To Avoid Ground Rent
When you rent, you expect that you will indeed pay the landlord or owner a certain amount each month to live in the property. This is, of course, the very definition of renting! When you own a home, however, you would reasonably expect your days of paying rent to be over. Not so fast. You may find yourself in a situation in which you own a leasehold and must pay ground rent.
What is ground rent – and more to the point, how do you avoid it?
Leasehold Ground Rent
Before we get into the ground rent meaning, let’s take a look at freeholds versus leaseholds so you have a better understanding of the situation. With a freehold, you own the property (i.e. the house and/or other structures), the land on which the property sits and the space above the property. It’s all yours. If you require financing, you will pay a mortgage. If you bought with cash, you will own it free and clear.
A leasehold is different. Here, you own the property but not the land on which it is situated. Further, in the case of an apartment, you do not own the building in which your unit is located. The land and, if applicable, the building is owned by the freeholder.
What Is Ground Rent UK?
With that in mind, what is ground rent? It is a payment you make to the freeholder. It is not a regular rent charge, which, as we know, is the monthly charge for living on someone’s property. Rather it is an additional charge. Why do leaseholders have to pay this? You are essentially engaging in a land rental situation, paying to “lease” the land that your house is on or the land and building your apartment or condo is in. This is on top of the payments you make on the house or unit.
What do you get in exchange for this extra fee? Well… Nothing. You get to live on a property on the land owned by someone else. That is it. Further, though, you will also likely have to pay a service charge. This is a flat annual fee charged by the freeholder (or by a management company on their behalf) that is intended for expenses such as garden and landscape work, maintenance and cleaning of common spaces and upkeep of onsite facilities (e.g. swimming pool, fitness centre, playground, etc.).
Paying service charges and ground rent is a tough pill for many to swallow. As well, you may find yourself in a situation where an unethical, unscrupulous freeholder increases ground rent charges regularly and significantly.
In short, ground rent means that you’ll pay an average of £400 per year (or more). While there is no standard way to calculate this charge, usually it is under £500 or £1000 in London. While freeholders can technically charge what they like, sums higher than this are usually seen as excessive. Still… There are no protective measures in place to prevent this from happening.
There are some problems you face with ground rent over £250 (or £1000 London). If you fall three months behind, the freeholder can repossess your property under Ground 8 of the Housing Act 1988. Additionally, lenders are hesitant (and some outright refuse) to provide loans on properties with ground rent over £250 or that which doubles. This can make it difficult, if not impossible, to mortgage, remortgage or sell.
When Will Ground Rent Be Abolished?
Good question. There have been calls – louder and more frequently of late – calling for an end to this practice and getting ground rent abolished. Look at it this way: you own your home but are, essentially, renting land and then paying for services on top of that. In many cases, the freeholders are fair and charge what is necessary to keep the property in good repair. The charge is low (often “peppercorn” rate – or just enough to maintain a legal leasehold situation.
However, some exploit their power and overcharge. You may have heard of the “Ground Rent Scandal.” Here, contracts in some new developments a few years back stipulated that rents would double every 10 years. This left many owners unable to move and unable to pay high bills. Some homes became unmortgageable. These people were stuck.
Under the Leasehold Reform (Ground Rent) Act 2022, ground rents for new regulated leases are effectively abolished as of 30 June 2022. Freeholders cannot charge more than one peppercorn per year (which is zero) and they cannot charge administration fees for these peppercorn rents. This applies to leases on brand-new properties, new leases on older flats and the extension of existing leases.
When these reforms were in the early days, Robert Jenrick, then Housing Secretary, said, “Across the country, people are struggling to realise the dream of owning their own home but find the reality of being a leaseholder far too bureaucratic, burdensome and expensive. We want to reinforce the security that home ownership brings by changing forever the way we own homes and end some of the worst practices faced by homeowners.”
The Leasehold Reform (Ground Rent) Act will benefit an estimated 4.5 million leaseholders across the UK. However, if you are a current leaseholder, you will not reap the benefits and will still have to pay this charge. What can you do?
Avoiding Ground Rent UK
First, you can’t pay ground rent. If you just stop, the freeholder has the legal right to pursue action, which can include repossessing your home. But you can try a few different tactics:
- Gain a share of the freehold. If you and at least half of the other leaseholders in your building join together, you can buy the freehold. If the property is a house, you may be able to buy the freehold yourself. There are pros and cons to this approach, which we will discuss in a moment.
- Get a deed of variation. If your ground rent is over £250, a deed of variation (cost: variable depending on whether you use a solicitor, which is highly recommended) can help you find relief. A deed of variation (DoV) is an agreement to change the terms of your lease. Through it, you could reduce your ground rent or even remove it. The freeholder must agree to this. Why would they? Because you can also try the following method:
- Extend your lease. You may have decades left on your lease. Why extend it (and pay for this process)? If you have less than 80 years left, extending your lease will increase your property’s value, make it easier to remortgage or sell and helps you avoid “marriage value.” (If you extend a lease with 80 or fewer years left, the freeholder is entitled to 50% of the value that the extension adds.) It also drops your ground rent to a “peppercorn.”
Buying a Freehold
Let’s back up. We mentioned that one way to avoid ground rent is to band together with another apartment/flat owner and purchase the freehold or buy the freehold for your house. First, consider that your costs will vary, but generally the shorter the lease, the more you will pay. Additionally, you will pay Land Registry fees, valuation fees, stamp duty, legal fees and legal and valuation fees for the freeholder. And, as always, the more people involved (e.g. multiple tenants), the more complex the process is.
If you do purchase the freehold, though, you have full ownership rights (either just you or you and your fellow “tenants”). If there were inefficiencies or issues with the management of the building/property, this is a great opportunity to rectify them and cut costs. It also makes your flat or property more attractive to buyers, should you decide to sell. Further, when you purchase a freehold, you can extend leases to 999 years and modernise the terms and agreements.
This may be a good move but consider some drawbacks. It can be an expensive proposition, as we have mentioned, but you also need to factor in the complexity of purchasing and managing a building on your own. From fire safety to asbestos, there is a lot to learn! It may be necessary to instruct a management company to tackle these issues and the day-to-day operation of the building/property. At the least, though, you will want solid legal advice as you navigate the purchase process.
Tension and disagreement between co-freeholders are also other areas of concern. It can be a sticky situation, for example, to pursue late payers who are your neighbours.
What If You Want to Sell Your Leasehold?
You do not want to pay any more ground and service charges. You can no longer afford your home. You need to move to be closer to family, work or school. Your life situation has changed and your home no longer serves your needs. For whatever reason, it may be time for your to sell your house and move on.
But if you live in a leasehold situation, this can be easier said than done. If your lease is relatively short, it can be very difficult to sell. The property just does not hold enough value for lenders to feel comfortable offering financing. As a general rule, mortgage lenders do not approve funds for properties that have leases of less than 75 years (it can be higher, depending on the lender).
So, if you can’t target mortgage buyers – who make up the bulk of the market – what can you do? You can turn to cash buyers.
Cash House Buyers
Many people may not realise that cash house buyers are willing to purchase leaseholds that are unsuitable for traditional lenders. If you feel as if you are stuck in an impossible situation, they can offer you a way out. Not only that, they can offer you a fair and reasonable way towards your next chapter in life.
Leaseholds with shorter leases are not often considered viable on the market. If you extend your lease, you could be looking at tens of thousands of pounds, and this may not be a feasible or desirable move for you. On the other hand, trying to sell a leasehold with a shorter lease (in this case, “short” refers to anything under 75-80 years) is difficult. As mentioned, mortgage lenders do not want to extend loans on these properties if the lease is short.
To cut to the chase, your property may not be attractive to the typical buyer. And this is why you may need to target the cash buyer. They have different goals – and different standards when it comes to making investments. Cash buyers do not need to base their decision on what their lender wants or expects because they have the funds available to complete a transaction now.
How Does the Process Work?
If you have investigated ways to sell your leasehold to a mortgage buyer – or if you have tried… and failed – it may behove you to consider a cash buyer. Here are some advantages:
- They can buy into leasehold situations. You do not have to worry that they will be turned off by your lease terms or length. Reputable cash buyers have experience in these types of transactions and know what they are looking for. They have specific investment and portfolio goals; your leasehold may be a good fit for them – and they may make an ideal solution for you.
- The timeline is accelerated. With a traditional sale (e.g. involving estate agents and staging and all that hoopla), you will be lucky to complete a sale in six months. If you do not have this kind of time, given your unique circumstances, this is not a viable route for you. With a cash buyer, you can receive an initial offer in 24 hours, a formal offer not soon after, and, if you want to continue, you can go to completion within a few weeks.
- You cut costs dramatically. When you sell your house in a conventional process, you need to think about solicitors’ costs, search and survey fees, valuations, staging, marketing, and instructing an estate agent. It adds up. A reputable cash buyer takes care of these details – and the attendant expenses.
- You are in control. Property transactions are complex and many people feel intimidated by the process. With the right cash house buyer, you are in control. You decide if an offer in principle is acceptable. You decide to proceed. You evaluate and decide to accept or decline the formal offer. You walk away from a troublesome leasehold situation with money directly deposited into your bank account.
When contemplating any major decision, it is vital to weigh the downsides as well. You should be aware that a cash buyer typically offers between 75% – 80% of total market value (some do offer as much as 85%). For easy math, say that your home has a value of £100,000. You could expect an offer in the range of £75,000 – £80,000 (or up to £85,000 with some buyers). Could you get more if you listed your house on the traditional market?
But you would also have to cover the expenses associated with a sales process as we mentioned earlier (e.g. estate agent and solicitor fees, surveys, valuations, etc.). You will also have to take steps to ensure your house is marketable to the average buyer. This may include making significant repairs or updates, from rewiring your house to repairing the roof.
In a leasehold situation, you will also have to factor in the length remaining on your lease. If it is under 80 years, many lenders will not approve mortgages for the property. And you will be subject to the marriage value (i.e. the freeholder gets 50% of the increase in value as a result of a lease extension). You are stuck in that case unless you extend your lease – which can cost thousand to tens of thousands of pounds, depending on the value of the property, the amount of time left on the lease, the annual ground rent, the value of improvements made by the leaseholder, etc.
One factor that plays a key role in the cost of an extension is the amount of time left on your lease. The fewer the years, the more it costs. In one case, extending the lease on a home with only 16 years left costs between £77,000 – £99,000. Certainly a case for extending sooner rather than later – or getting out from under the situation altogether with a cash buyer.
This was, of course, an uncommon case. Usually, the cost to add 90 years to a lease on a £200,000 flat ranges from £28,000 with 60 years left to just £4,500 with 90 years left. As you can see, the cost rises significantly the shorter the remaining lease is. At 80 years and fewer, you’ll see your costs jump exponentially every year. Your chances of selling also drop as lenders do not want to take on this risk.
Avoiding Ground Rent UK
In this guide, we have covered a wide range of information on leaseholds, ground rent, and service charges, as well as ways to bypass this “extra charge.” In short, you can avoid this by:
- Buying into a leasehold (whether a new build or a new lease on an existing building/property) eliminates ground rent. This, however, does not help the people currently paying ground rent.
- Extending your lease. While it does cost quite a bit, extending your lease also eliminates ground rent under the Leasehold Reform Act. It also makes your house more marketable for traditional buyers (i.e. those with mortgages)
- Selling your leasehold. As mentioned, it can be very difficult to sell your leasehold, depending on the number of years left on the lease and the amount of ground rent (as well as other factors). A reputable cash buyer can be just the solution for which you’ve been looking – and hoping. They are typically the only type of buyers who can purchase in these types of situations, and the right company will offer you a fair and reasonable price.
Ground rent is not necessarily a “bad” or “unnecessary” fee, and most freeholders do charge a very low or even “peppercorn” rate. However, due to unscrupulous actions by some and the pressing need for more accessible and attainable housing in the UK, the Leasehold Reform Act has done much to eliminate this expense for millions of leaseholders.