Onerous Ground Rent: Selling or Remortgaging a Flat

You bought a leasehold flat, paid the ground rent when it was demanded and may have lived there for years without difficulty.

Then you decide to sell or remortgage.

The buyer’s conveyancer examines the rent-review clause. A valuer questions how the rent will increase. The proposed lender will not proceed unless the lease is changed, or asks for information that nobody raised when you bought.

For many owners, this is the first indication that their ground rent may be considered onerous.

What makes a ground rent onerous?

There is no single description that resolves every case. The exact wording of the lease, the current rent, the review mechanism and the proposed lender’s requirements all matter.

Features that commonly attract attention include:

• a relatively high starting rent;
• rent that doubles at fixed intervals;
• frequent reviews;
• increases calculated by applying a fixed multiple;
• index-linked reviews that may produce substantial future figures; and
• unclear or disputed review provisions.

The problem is not limited to what the leaseholder pays today. A buyer, valuer or lender may consider how the rent could change throughout the remaining lease term and what that could mean for value, marketability and mortgage security.

Why can ground rent affect a mortgage?

A mortgage lender takes the property as security. Its conveyancing instructions may therefore address the amount of ground rent, the frequency of reviews and the method used to calculate future increases.

Where one conveyancer acts for both buyer and lender, that conveyancer must advise the buyer and comply with the lender’s requirements. If the lease does not meet those requirements, the conveyancer may need to report the position and wait for the lender’s decision.

That can happen even when:

• the rent has always been paid;
• the current annual amount seems affordable;
• the seller obtained a mortgage without difficulty; or
• another lender previously accepted the lease.

Lenders do not necessarily take the same approach, and individual lenders can change their requirements over time.

Doubling and escalating ground rents

A doubling clause increases the rent by a fixed multiple at stated intervals. The immediate figure may look modest, but later amounts can be materially higher.

Other leases use an index or a formula rather than a fixed multiple. Index linking is not automatically benign or automatically onerous. The review frequency, drafting and likely operation over the lease term must be understood.

The useful questions are:

• What is the ground rent now?
• When was it last reviewed?
• When is the next review?
• How often will reviews take place?
• What calculation does the lease require?
• What could the rent become later in the term?

The answers should come from the lease itself, not solely from the latest demand or management information.

Other ways the problem can surface

Ground-rent difficulties do not always begin with the wording of an escalation clause.

A review is due or overdue

The new rent has not been determined, leaving uncertainty about the current liability and whether an increase may be backdated.

A clear receipt cannot be produced

A buyer’s solicitor may ask for evidence that the rent is paid up to date. Delay or uncertainty can arise if the landlord or managing agent has not issued demands or receipts.

The demand is unexpected or disputed

An owner may receive a backdated demand or an amount that does not appear to follow the lease. It should not be ignored, but the calculation and validity may need to be checked.

The buyer’s lender applies a different policy

A clause accepted by the owner’s original lender may not meet the buyer’s lender’s present requirements.

Start with the lease, not a general rule

Ask your conveyancer to identify the ground-rent clause and explain:

• the current rent;
• the review dates;
• the review formula;
• any outstanding or disputed sums;
• the projected effect of the clause, where a reasonable illustration can be given; and
• the precise concern raised by the buyer, valuer or lender.

It is important to establish whether the transaction is being delayed because of the lender’s instructions, the valuer’s assessment, the buyer’s own concerns or an unresolved account with the landlord. Those issues may require different responses.

Can a deed of variation resolve the problem?

A deed of variation can change the terms of a lease. In a ground-rent case, it might alter the rent, review frequency or escalation mechanism so that the provision becomes acceptable to the parties and the proposed lender.

The landlord’s agreement is normally required, and there may be legal fees, a premium or administrative charges. Where the flat is already mortgaged, the existing lender’s consent may also be needed.

A variation can take time. If a sale is contemplated, it is better to investigate the problem before a buyer is close to exchange.

The wording of any proposed variation should be checked against the requirements of the lender involved in the transaction. Agreeing a change with the landlord does not, by itself, guarantee that every lender will accept it.

Will indemnity insurance fix an onerous ground rent?

Usually, insurance and variation address different things.

An indemnity policy may sometimes respond to a defined legal or enforcement risk, subject to its wording and exclusions. It does not rewrite the lease, reduce the rent or remove an onerous review formula.

It should therefore not be presented as though it makes an escalating ground rent acceptable to every lender. The precise concern and the proposed lender’s requirements must be identified first.

What should you do if your transaction is delayed?

If you are selling, ask your conveyancer to obtain a clear written explanation of what remains unresolved. Establish whether the issue comes from the buyer, the buyer’s valuer or the buyer’s mortgage lender.

If you are remortgaging, ask your conveyancer to check the proposed lender’s requirements and determine whether the matter must be reported.

It may help to collect:

• the complete lease and any supplemental deeds;
• all ground-rent demands and receipts;
• the latest management information;
• correspondence about previous reviews;
• any existing deed of variation;
• the buyer’s or lender’s written objection; and
• documents from your original purchase.

Do not ignore a valid demand while the wider issue is investigated. If an amount is disputed, obtain advice on the demand and the lease rather than withholding payment without understanding the consequences.

What were you told when you bought?

The rent and its review mechanism were already written into the lease when you purchased the flat.

Where the rent increased by a fixed formula, future figures may have been capable of calculation. Where an index was used, the exact future rent may not have been known, but the method, review frequency and potential effect could still be identified.

The questions are therefore not confined to whether the lease mentioned ground rent. They include:

• Was the review clause clearly explained?
• Were you shown how frequently the rent could change?
• Was the potential effect later in the term discussed?
• Were implications for value, saleability or mortgageability raised?
• Was the provision reported to your lender where required?
• Was a deed of variation considered or requested?
• Would fuller information have affected your decision or the price paid?

The presence of a difficult clause today does not, by itself, establish that anyone was negligent. The advice must be assessed against the purchase date, the information available and the circumstances of the transaction.

Which historical documents may matter?

The original purchase records can help reconstruct what happened. Relevant material may include:

• the lease;
• the report on title;
• replies to leasehold enquiries;
• management information from the landlord or agent;
• ground-rent demands and receipts;
• the valuation;
• correspondence with the seller’s conveyancer;
• any communication with the mortgage lender; and
• the lender’s written requirements in force at the time.

No single document necessarily supplies the whole answer. The lease shows the obligation, while the conveyancing file may show how it was investigated and explained.

Why the original mortgage does not settle the question

The fact that a mortgage completed shows that the original lender proceeded. It does not necessarily establish how readily mortgageable the property was across the wider market or what advice the purchaser received.

Lender requirements concerning ground rent have varied between institutions and changed over time. The appropriate historical question is not simply, “What does this lender say about ground rent today?” It is:

What did this lender’s written requirements say on the relevant date when the property was bought?

Even that is only one part of the investigation. What the conveyancer had to tell the lender and what the conveyancer had to explain to the purchaser are related but distinct questions.

Could the problem have been anticipated?

The starting point is what was known, or could reasonably have been identified, when the flat was purchased.

That involves comparing the lease, the management information, the conveyancing file, the contemporary lender instructions and the advice actually given.

If an escalating or doubling rent is now preventing a sale or remortgage, read When I Bought’s detailed guide to onerous ground rent. It explains why the purchase date and original lender matter, what historical evidence may survive and the limits of what that evidence can establish.

You do not need to decide for yourself whether anyone was at fault before asking what happened. The first step is to identify the clause, the present objection and what the records from the purchase show.

This article provides general information only and is not legal or financial advice about any lease, property, transaction or potential claim. Ground-rent law and mortgage-lender requirements change. No monetary threshold or review formula should be treated as universally acceptable. Obtain advice from appropriately qualified professionals. Time limits may apply to legal claims.