211: What can I do about my escalating ground rent?
The problem is familiar to residential property lawyers. An excited client tells her solicitor she has found a buyer for the newly built leasehold property she purchased a few years ago, and instructs him to prepare a contract for the sale. For a few days all goes well – until the buyer’s lawyer mentions the words ‘escalating ground rent’ and confirms that the buyer’s mortgage company will not proceed with the mortgage.
Traditionally ‘ground rents’ were common but low – say £50 a year – and did not change during the lease. That changed when it was realised that the landlord could sell the right to receive the income for a useful capital sum, and that if the rent increased regularly, the capital sum received would be even bigger.
One developer required rents to double as often as every 10 years: equivalent to a bank interest rate of about 7% a year and an increase for the tenant of way more than current inflation. As a result, mortgage companies became cautious and flats unsellable: for example, the Nationwide Building Society will not take mortgages over properties where the ground rent doubles more often than every 20 years.
Our seller and buyer can solve the problem in a number of ways. The cleanest is for the lease to be varied so the escalating rent is completely extinguished. Legally this is straightforward, but the landlord will want compensation for giving up the right to receive the income from the escalating rent – and this can be very substantial indeed. The amount of compensation payable can be reduced by reducing the ground rent by a smaller amount that leaves the landlord with a fixed income of a level acceptable to lenders.
Another possibility is for the leaseholder to extend her lease. In most cases the tenant of a flat can extend the lease by 90 years and will pay no ground rent at all under the new lease. The catch is that the landlord must be paid compensation both for the longer lease and for the ground rent. That will be an even larger amount than compensation for the ground rent alone, but the tenant does get the longer lease.
The money to pay off the landlord must come from somewhere, and there are a number of options. One is for the flat owner to sue the solicitors who did not advise about the escalating ground rent clause in the first place. Flat owners who need to take this course must start the court action within 6 years of the date they purchased their lease – or if that date is passed – within 3 years of their first becoming aware of the problem. Delay is fatal because the time limits are strict.
Another option is to put pressure on the freeholder or the developer company. The Competition & Markets Authority (CMA) started enforcement action against four major housing developers in September 2020 arguing that the leasehold terms were unfair and unenforceable as ‘unfair contract terms’ under consumer protection law.
Last month the CMA wrote to two developers requiring them to remove the ground rent terms that it considers are unfair from ‘all existing contracts’ to ensure the developer are no longer are in breach of the law; and Taylor Wimpey set aside £130 million in 2016 to address the problem, so they at least have funds available.
Whether the terms of any lease are actually ‘unfair’ (and thus unenforceable) under consumer protection law depends on the exact terms of the relevant lease and the circumstances of the transaction under which the leaseholder acquired the lease, so consumer protection law may not automatically be the answer for tenants.
However, in several cases when faced with the prospect of publicity landlords have been willing to amend leases so as to make them acceptable to mortgage lenders and thus become sellable despite the original escalating rent clause.