It is usual for a property lease to contain a provision enabling the freeholder (also known as the landlord) to review and amend the ground rent after a certain period of time. The increase may be expressly set out in the lease, for example as a percentage, or by reference to an inflation-measuring index.
However, an increasing number of leases now contain review clauses that provide for an automatic doubling of the ground rent, in some cases as often as every ten years. This has been especially prevalent among some property developers, who have been routinely selling new-build houses as leaseholds rather than freeholds, and inserting an escalating ground rent clause into the leases. Once the development is finished, the freehold is then sold to a property investor who receives the ground rent every year and is not obliged to maintain any common areas on the development.What is the problem?
At first glance an escalating ground rent clause may not appear to be a problem; it is reasonable to expect that rents will increase to avoid the freeholder losing out from the effects of inflation. However, over the lifetime of a 150-year lease with the ground rent doubling every 10 years, by the end of the lease the ground rent will have escalated from the original by some 819,200%. In real terms, such a lease with a starting ground rent of £200 per year would finish with a rent of £3,276,800 per year.
Increased awareness of the damaging potential of these clauses has meant that they are frequently a problem for prospective purchasers of leasehold properties. A leasehold interest in a property inherently loses value over time as the remaining term of the lease reduces; a 100-year lease will always be more valuable than a 50-year lease of the same property on the same terms. When combined with an escalating ground rent clause, these properties can become unattractive to potential buyers.
Mortgage lenders have also become increasingly wary of these clauses, with many refusing to lend on properties with rent review clauses that they consider to be onerous.What are my options?
Unfortunately, many leaseholders who have an escalating ground rent clause in their lease are not aware of the existence of the clause until they attempt to sell their property or extend their lease.
Some cases, landlords may agree to new, less onerous rent review clauses either as part of a lease extension or by way of a Deed of Variation to an existing lease. Our conveyancing solicitors are able to assist with both of these matters. However, these negotiations are not guaranteed to be straightforward, and in some cases unscrupulous freeholders have attempted to increase the rate at which the ground rent increases rather than accepting reduced terms. Negotiating a variation of a lease as part of a sale transaction is also likely to incur delays for the whole chain.
It is the responsibility of a conveyancer to fully explain the implications of the terms of a lease and other title documentation to their client when acting on a purchase. Failure to do so may constitute a breach of the solicitor’s duty of care, and is likely to give rise to a claim in professional negligence. Our solicitors have experience of such claims against other legal professionals, and our expertise in conveyancing gives us the necessary understanding of how you should have been advised when making the original purchase. It is important to note that limitation is often an issue in these claims; generally speaking, claims against solicitors must be brought within six years of the conclusion of your matter (known as the limitation period). It is therefore in your interests to bring a claim as soon as possible.