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Significant Changes to Ground Rent Rules

Significant Changes to Ground Rent Rules

The rules around ground rent are changing. Find out what the new regulations are, when they come into force and who’s affected in our concise article.

What is ground rent?

Traditionally, ground rent is a regular charge by freeholders to leaseholders. With leasehold properties, the property owner does not own the ground on which the property is situated; therefore, the freeholder (who owns the land) can charge ground rent. This is most common in blocks of flats where an individual may own the leasehold of the flat, but not the ground on which the block resides.

In essence, it’s a charge for renting the land from the freeholder, but doesn’t usually cover any other services (and is not the same as a service charge).

What’s the problem with ground rent?

Technically, there is no legal limit to how much ground rent freeholders can charge leaseholders. However, many mortgage lenders include ground rent caps in their lending criteria to ensure borrowers can afford the property. Typically, this is around £250 a year for properties outside of London and £1,000 per year for those in the capital. Properties with ground rents above these caps are difficult for new buyers to mortgage and, consequently, difficult for existing owners to sell.

Technically, freeholders are at liberty to increase ground rents with little or no benefit to those paying the charge, whenever they want. Furthermore, there have been issues where lease agreements include clauses for ground rent to double at specific intervals. E.g., You may start with a ground rent of £50 a year, which doubles to £100 a year 10, then £200 a year 20, then £400 a year 40 etc. This makes it very difficult for leaseholders to continue affording the property with such escalating costs.

What’s changing?

As part of the Government’s effort to make owning your own home more attainable and affordable, freeholders will no longer be able to charge ground rent to new long leaseholders. The change will come into effect from 30th June 2022. Anyone about to sign a new lease before the ban comes into place should speak to the freeholder to ensure their agreement is in line with the new rules. Leaseholders will also be able to extend leases by 990 years at zero ground rent.

What about existing leasehold agreements?

While many freehold landlords have already changed ground rent agreements to £0 ahead of the change, many leaseholders will still be under contract to pay this charge. Legally, the change does not include existing leasehold agreements, unless you are extending the leasehold. Consequently, many campaigners do not believe the legislation goes far enough. Should the Government decide to extend this legislation change to all existing leasehold arrangements, we will, of course, provide an update. If you’re concerned about your leasehold agreement, we recommend speaking to your solicitor.

If you need help mortgaging a leasehold property, we can help! Whether it’s for investment purposes or to live in, contact our expert team on 0345 345 6788 or submit an enquiry.