Pitfalls of Leasehold Property – Ground Rents

There are two main types (tenure) of property you can buy in England, Freehold and Leasehold. With Freehold, you will own the property and the land that it sits upon and they are usually houses. With Leasehold, you will own the property but not the land it sits upon so you will usually have a landlord to whom you pay an annual rent for the “ground”, and this is what is known as ground rent.

All Flats will have a Leasehold title (even if you are told you are buying a share of the freehold).

There are over four million leasehold properties in England, according to a government estimate. While 1.4 million are houses, the majority are Flats. Some 69% of all new build homes in 2016-2017 were Flats.

Now, imagine how you would feel, if your Landlord was able to take your Flat away from you. You have spent hundreds of thousands or even millions of pounds buying your dream Flat, or perhaps it was an investment Flat, a pension pot or maybe this Flat was a future provision for a child or grandchild. Do you think it is really possible that such a valuable asset could be taken away from you and for what reason? How about that you forgot to pay the ground rent or you got into arrears with your ground rent?

There are numerous pitfalls to buying and owning a Flat but two main problems with owning a Flat, where you have to pay ground rent is the topic of this article.  These problems have been highlighted in the press in recent years and the government have had various consultations but no real action has yet been taken to address the problems.

The first problem is the rising ground rent. When you bought your Flat, you might have thought the ground rent was not such a big sum, perhaps £50 or £100 per annum. However, more and more Flat owners are finding (especially with new build Flats) that ground rent is doubling every 10 or 20 or 25 years. So, very quickly you could be paying quite a large sum of money for ground rent.  This can have an effect on the value of your Flat especially if it is your intention to hold onto the Flat for a number of years or to be handed down from generation to generation. Some new build Flats in London start ground rent at over £1,000 per annum and gradually rise during the term of the long lease.

The second problem arises because of an oddity in the Housing Act 1988. The Housing Act 1988 was introduced to protect tenants of short-term lettings under an Assured Shorthold Tenancy agreement.  If you have ever rented a Flat or House you may be familiar with this type of tenancy agreement. What the Housing Act 1988 was not meant to do, was apply to Flats sold on long leases for a lot of money, but it can. That is because, Flats with long leases that pay ground rent which is above a certain level are automatically treated as an Assured Shorthold Tenacy agreement.  So, it came as a huge surprise to some Flat owners, who found themselves in court for not paying the landlord the ground rent, and to make it worse they found that the court was on the landlord’s side, even though the amount of ground rent was so little compared to the value of their Flat. What is important to understand, is being in arrears of ground rent gave the landlord the mandatory ground to ask the court for repossession and however unfair it seems, the courts hands were effectively tied and they had no choice but to follow the law and grant an order for repossession.

Lots of suggestions have been made to the government during consultations to try and tackle these problems, which are only going to worsen over the years if not dealt with. One option, was to get rid of leasehold properties and whilst this is likely to happen for leasehold houses (eventually) it is highly unlikely for Flats.  Another suggestion was for payment of ground rent to be scrapped totally. This option would certainly get my vote, because if payment of ground rent were scrapped a) Flat owners could not be held to ransom by their landlords for increasing ground rent that devalues the capital asset and b) this oddity of the Housing Act 1988 where an expensive Flat was treated as a simple assured shorthold tenancy agreement simply would not exist. Conversely of course, how would those landlords who have made those ground rent investment purchases be compensated?

Don’t be put off buying a Flat but hopefully the above will make you think about some of the potential pitfalls in buying Flats that you may not have thought about before or simply not be advised about in previous purchases. Buying Flats can be complex, try and make informed decisions and get the full picture from someone who knows what to look out for!

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