What is a lease?
In layman’s terms a lease is a contractual agreement between a freeholder and one or more leaseholder’s for a set period of years outlining what can and can’t be done during the duration of the lease within the specified property. Common stipulations include but are not limited to: No pets without the permission of the freeholder, no loud music to be played after midnight and no commercial vehicles to be parked within the development.
How long do leases last for?
Most original leases are granted for a period of 99, 125 or in some cases 999 years and will reduce in term on a yearly basis until they are either extended or come to the end of their term.
What is ground rent?
To keep things simple, ground rent is a yearly charge a leaseholder must pay the freeholder for the right to occupy the building, alter and amend the property in question and sell, re-mortgage or rent it, subject to the terms of the lease, in return for the payment of a ground rent which can be either fixed or escalating.
Can the ground rent increase?
Ground rent is usually fixed in the lease, but some leases - especially among new-build leaseholds contain a rent-escalation clause which allows the ground rent to be increased at set intervals. Alternatively, any increase may be in accordance with a recognisable and published formula such as the retail prices index (RPI).
Some ground-rent increases are rising in accordance with no recognisable formula, simply doubling after a fixed period of time. Unfortunately this isn't currently illegal and an initial ground rent of £200 which doubles every 20 years during the course of a 125 year lease would mean a ground rent of £12,800 is payable at the end of the lease term!
This has presented an issue for many lenders in the last few years who will now refuse to lend on an escalating ground rent and instead insist on a fixed amount for the entirety of the lease or increase in accordance with the RPI. It also will be much more expensive to extend a low lease as ground rent for the remaining lease term is taken into consideration.
What happens if I don’t pay my ground rent?
Failure to pay your ground rent can have severe consequences. If you don't pay your ground rent, the freeholder can apply to the court for repossession of the property if you're three or more years in arrears with your ground rent or if you owe £350 or more worth of ground rent, service charges and administration charges. Not all leases have this clause but it is becoming more common in modern leases and may hinder a buyer obtaining finance making the property more difficult to sell.