QUESTION
I (with my partner) currently own a leasehold flat - built in 2017. We have a lease which currently has 140 years remaining on it.
Within our lease, and what I am mostly querying, is my ground rent charges, and the likely difficulty we would face should we come to remortgage/sell.
My ground rent from 01/01/2014 (despite not being built until 2017, as it was when the lease was originally drawn up) was set at £250 PA. Within the lease, there is a clause to rent reviews each 10 year period rising with RPI.
As of 01/01/2024, my ground rent has increased to £374.50 PA. I believe, if I've understood correctly, that due to this, I would struggle to sell the property or remortgage with a new provider. This is due to the fact that 1) the ground rent is more than 0.1% of the property value (approx. £250,000) and therefore deemed onerous, but also 2) It is more than £250 PA and outside of London, which means it is now deemed as an assured shorthold tenancy, and therefore a risk to mortgage lenders should it fall into arrears.
I note from the recent changes in legislation, that I can renegotiate quite easily with my Freeholder - however, I noted within the request documents that they would not agree to a review of the current rent provisions. They would only agree to a peppercorn rent after the existing term of 140 years is up.
We are looking to sell up within the next 12 months, so I want to ideally get my ducks in a row so that we're not held up by having to sort this out (or not knowing what we're best to do) so welcome any advice you can help me with.
ANSWER
You appear to have a good handle of the relevant considerations!
An “onerous” ground rent can make it difficult for a seller to find a buyer, not least of all because many lenders now have strict requirements when it comes to ground rents. “Onerous” is not a legally defined term, but any ground rent which exceeds 0.1% of the value of the property or £250 per annum outside of London is generally considered to fall within this category.
Each lender has their own lending policy on what they consider to be acceptable for lending purposes. They will also have their own requirements on what action they require a buyer to take to remedy an unacceptable ground rent before they will lend. This includes everything from a full lease extension (which removes the ground rent as part of the process in cases where the landlord will not agree to simply remove the ground rent voluntarily), a voluntary deed removing ground rent or reducing it below a certain amount, a declaration from the landlord agreeing not to take certain enforcement action for any unpaid ground rents (known as the “Housing Act trap”) or indemnity insurance. In these cases, it is the seller who has to progress the remedy before the buyer will buy, and usually at the seller’s cost. In cases where a landlord agrees to rectify the problem, the process is much faster and simpler than where the landlord refuses to agree and has to be forced to remedy the position via a statutory lease extension. For example, an agreed deed can take weeks to complete whereas a statutory lease extension often takes 8 – 10 months to complete.
The landlord will also expect to be paid for varying the ground rent; a good valuer will be able to assist you with how much you can expect to pay for a ground rent amendment, whichever form that takes.
As noted in your question, this area of law is in the process of being reformed. As part of that, there are proposals to give those affected by an “onerous” ground rent a new right to buy out the ground rent without doing a lease extension, and general proposals to make the overall premium and costs cheaper than is currently payable. There are also separate proposals to cap ground rents entirely without leaseholders needing to proactively apply to fix their ground rents. The timeframes and certainty of these reforms are still very much unknown, but unlikely to be fully implemented for many months yet.
A practical approach might be to contact the landlord now to see if a deal can be done. Some landlords are agreeing to a reduced premium to remove ground rents, so if there is willingness here, an informal deal is likely to be the quickest way to resolve the matter, although not necessarily the cheapest. As with many cases we have had over recent years, it often comes down to a choice between certainty and speed (proceeding now) versus potential savings if and when the reforms proceed (waiting).
Matt Lewis, Consultant Solicitor at Commonhold and Leasehold Experts Limited
