Ground rents have created quite the scandal, predominately focussed on leasehold houses, however attention has also shifted to the ground rent attributed to leasehold flats.
The Communities Secretary announced new measures to crack down on what he coined abusive and unfair practices within the leasehold sector and it will be interesting to witness how, and if, these measures are implemented.
In the interim the leasehold sector has continued seemingly unaffected.
We must consider, that with the introduction of the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”), which provides qualifying leaseholders with the ability to extend their lease by an additional 90 years and reduce their ground rent to a peppercorn (which means nil) why we continue to see aggressive ground rents being agreed. A system, introduced to balance the bargaining power between the Freeholder and Leaseholder, would offer the leaseholders suitable protection therefore we must query why have onerous terms been agreed.
Leaseholds are depreciating assets and an extension of the lease term safeguards the property investment. Many leaseholders are unaware that a lease term which falls below 80 years attracts a higher premium as a result of marriage value. Marriage value is the increase in the value of the property following the completion of the lease extension, and this increase in value is “shared” with the Freeholder. It is paramount to safeguard a property investment by extending the leasehold term, and the stronger the lease term at the time of the said extension, the lower the premium that should be payable to the Freeholder. Another factor, when calculating the premium payable to a Freeholder, is the loss of ground rent.
Where possible, and a leaseholder is a qualifying tenant, the statutory process should be initiated. By serving a statutory notice a leaseholder freezes the valuation date, is statutorily entitled to a 90 year top up to the existing term and a peppercorn ground rent.
Informal lease extensions have received bad press due to onerous ground rents being agreed in extreme cases and should be considered carefully. In a situation where a leaseholder is selling a property with a low lease and an incoming buyer requires a mortgage to purchase the said property, an informal deal can prove quite useful. Provided specialist solicitors and surveyors are instructed to advise a lessee, a reasonable deal can be agreed to include a ground rent which is non-aggressive and a top up of the term to facilitate completion of the sale. What must be explained to a leaseholder, and surveying advice sought in this regard, is a rising ground rent can affect marketability in the future. To later remove a ground rent a leaseholder must compensate a Freeholder for this loss of ground rent. These calculations should be explained and considered when negotiating informal deals which attract a rising ground rent. RPI (Retail Price Index) increases, which are possibly seen as fairer as the multiplying increases, are difficult to predict for future increases. Careful consideration should be given to the wording of the rent review provision in the lease and the impact of such ground rent provisions explained to the leaseholder.
An informal lease extension can benefit both parties by providing the leaseholder with a lower initial outlay to pay in terms of premium and a Freeholder can retain the ground rent of the said property. Provided suitable advice is sought and the provisions are commercially negotiated and carefully drafted a reasonable deal can be obtained.
Ideally, the most attractive option is a 90 year top up with a nil ground rent which is achievable pursuant to the Act. Commercially, however, the Act may not necessarily meet the requirements of every leaseholder whereby an informal lease extension may be suitable. The important point is to ensure that transparent and clear advice is sought from specialists to ensure the informal ground rent provisions agreed are not onerous which will impact on the marketability of the property. An onerous ground rent can be removed at a later stage by proceeding down the Act and removing the ground rent to a peppercorn. However, as mentioned earlier, a Freeholder is compensated for a loss of ground rent and if a particular ground rent is onerous or difficult to calculate this can become a costly exercise for the leaseholder. Advice must be sought to avoid these pitfalls.
To summarise, it is vital to protect a leasehold investment by increasing the term and advice should be sought in this regard when considering whether to agree an informal deal or proceed via the statutory route.
Angela Alexiou, Solicitor at YVA Solicitors LLP
