A ground-rent clause may sit unnoticed in a lease for years. The owner pays the amount demanded, the original mortgage continues and nothing appears to be wrong.
The problem often emerges when the property is sold or remortgaged. A buyer’s conveyancer examines the review provisions, the proposed lender applies its current requirements and questions are raised about how much the ground rent could become.
For the owner, this creates two separate questions:
- What needs to be done to progress the sale or remortgage now?
- What was I told about the ground rent when I bought?
Why can ground rent affect a sale or remortgage?
Ground rent is an amount payable under the lease. The current figure is only part of the picture. A buyer, conveyancer or mortgage lender may also consider:
- how frequently the ground rent is reviewed;
- the formula used to calculate an increase;
- whether it doubles at fixed intervals;
- how the rent compares with the value of the property;
- what the lease permits the landlord to do following non-payment;
- whether the provision meets the proposed lender’s requirements; and
- whether the clause could make the property more difficult to sell or remortgage.
A relatively modest payment today can therefore cause concern because of what the lease says will happen later.
Mortgage lenders do not necessarily apply identical requirements. A clause accepted in one transaction may be questioned by a different lender on a later sale. Requirements can also change over time.
Didn’t ground-rent reform solve the problem?
The Leasehold Reform (Ground Rent) Act 2022 restricted ground rent in most new qualifying long residential leases to a peppercorn. It did not simply rewrite the ground-rent clauses contained in every existing residential lease.
Owners of older leasehold properties may therefore remain bound by the ground-rent provisions agreed when their leases were granted. Proposed or subsequent reforms also need to be distinguished from the actual terms of the lease and the requirements of the lender involved in the current transaction.
The practical question is not merely what ground-rent policy looks like today. It is what this lease says, what the proposed lender requires and whether any amendment or other solution is needed.
What should the original report on title have explained?
A report on title should help the purchaser understand the legal and practical consequences of the property documents before becoming committed to the purchase.
In a leasehold transaction, the relevant explanation may include:
- the ground rent payable at the start of the lease;
- when it will be reviewed;
- the method by which increases will be calculated;
- examples showing the possible future payments;
- the consequences of late payment or non-payment;
- any concern raised by the purchaser’s mortgage lender;
- whether the clause could affect a future sale or remortgage; and
- whether further negotiation or a deed of variation should be considered before exchange.
Simply reproducing the ground-rent clause may not give a purchaser a meaningful understanding of its effect. The important question is whether the buyer was given enough information to appreciate the obligation and its possible long-term consequences.
The Solicitors Regulation Authority considered this wider issue in its 2019 residential conveyancing thematic review. It warned that ground rent or service-charge terms which are not properly reviewed and explained can leave leaseholders exposed to escalating charges and, in serious cases, affect saleability.
Our earlier article, Inadequate Leasehold Reports on Title: What the SRA Found, examines those findings and why shortcomings in leasehold advice may only become apparent years after the purchase.
“But my lender gave me a mortgage”
Completion of the original mortgage does not necessarily answer whether the ground-rent implications were properly explained to the purchaser.
The conveyancer may have been acting for both the buyer and the lender, but the two relationships involved different reporting obligations. Satisfying the lender’s requirements did not remove the need to advise the buyer about the lease and its practical consequences.
Nor does the original mortgage establish that every other lender would have treated the clause in the same way. The original lender’s requirements, the wider lending position and the requirements applied by the buyer’s proposed lender may all be different.
That is why the identity of the original lender and the date of the purchase can matter when investigating what happened.
What should you look for in the original purchase file?
If a ground-rent clause is now obstructing a sale or remortgage, the original purchase records may help establish what was known and explained.
Relevant documents may include:
- the lease and any deed varying it;
- the report on title or report on the lease;
- correspondence explaining the ground rent;
- replies to leasehold enquiries;
- the mortgage offer and any special conditions;
- communications concerning the lender’s requirements;
- advice about resale or remortgage implications; and
- any calculation or illustration of future ground-rent increases.
It is also important to establish whether the clause was identified but inadequately explained, or whether it was not drawn to the purchaser’s attention at all.
Does a problem now mean the original advice was inadequate?
Not necessarily.
A lender raising an objection today does not by itself establish that the original conveyancer made a mistake. The current lender may have different requirements, the lending market may have changed or the ground rent may have increased since the original purchase.
A proper review needs to consider:
- what the lease said;
- what information was available;
- what the original lender required;
- what work the conveyancer undertook;
- what the purchaser was told; and
- how the current problem relates to the original transaction.
The fact that the property has become more difficult to sell or remortgage may provide a reason to investigate. It is not, on its own, a conclusion about responsibility.
What can be done about the ground-rent clause now?
The available options depend on the lease, the freeholder, the lender and the proposed transaction.
They may include:
- obtaining clarification of the proposed lender’s requirements;
- negotiating a deed of variation;
- agreeing a lease extension which changes the ground-rent terms;
- considering whether statutory lease-extension rights are available;
- changing the proposed lender, where appropriate; or
- renegotiating the transaction to reflect the unresolved issue.
A deed of variation requires the agreement of the necessary parties and may involve the freeholder, management company and mortgage lenders. It should not be assumed that it will be available quickly or on acceptable terms.
Before committing to a particular solution, the parties should establish exactly what objection has been raised and what would satisfy the buyer’s lender.
What happened when you bought?
If the ground-rent problem only became clear when you tried to sell or remortgage, it may be worth examining the position at the time of your purchase.
When I Bought’s guide to ground-rent problems discovered after purchase explains:
- why a ground-rent clause can affect mortgageability and resale;
- which documents from the original purchase may matter;
- why the original lender and purchase date can be relevant; and
- how to arrange an initial conversation about what happened.
You do not need to decide that anyone was at fault before asking whether you received the right advice when you bought.