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Escalating Ground Rent – What will the future hold?

August 13, 2018

The recent adverse publicity regarding ground rent is high on the agenda for Landlords (including developers) of new build flats and the effect that escalating ground rents within leases can have on both mortgage-ability and saleability of properties in the current market. 

We have set out below some background information on this complex issue.


If ground rent in a lease is more than £250pa outside of London or £1000pa within London, in properties being occupied by a tenant as their only or principle home, current legislation means that any leases with a ground rent of above these limits could result in them being classed as an assured tenancy under the Housing Act 1988.   The issue has arisen as Leases have started to contain unfair ground rent escalation provisions such as doubling every 10/15 years over a term of 999 years.  This results in an extremely high ground rent which could affect the value and future marketability of the property.

The main issue

Ground 8 of the Housing Act 1988 allows a Landlord to apply to the court for an order to take possession of a property where the ground rent is 3 months in arrears, and as this is a mandatory ground for possession, the court cannot refuse such an order.   If the ground rent is very high there is more chance of a Tenant falling into arrears, allowing the Landlord to take possession.  In normal leases (i.e not shared ownership ones) there is no requirement for the Landlord in this situation to notify the mortgage lender that they are looking to take possession and as this is a mandatory ground and the court cannot refuse to grant an order for possession, a lender could end up losing their security without even knowing about it, by which point it would be too late for them to pay the arrears. 

To recap, leases which have ground rent above £1000 in London or £250 outside of London are currently classed as an “assured tenancy” under the Housing Act 1988. This means that the Landlord can seek to end the lease by an order of the court, and attempt to evict the Tenant if there is ground rent more than 3 months in arrears.  The Government is considering amending the Housing Act 1988 to exempt leaseholders from legislation that was intended to ensure that rack rent tenants in the private rented sector do not build up rent arrears.   Ground 8 is particularly relevant as it covers mandatory grounds for possession for an assured tenancy and concerns arrears of rent.  The mandatory nature of Ground 8 means a judge cannot refuse to make the order.   So effectively if any Tenants were more than 3 months behind in their rent, a Landlord could apply to the court for a possession order to evict the Tenant and this would automatically be granted.  

Ground 8 and the implications that it can cause on lenders security is the reason that most lenders now have guidance on the levels and future increases of ground rent that they will accept.

 What has been the response of lenders?

 A lot of lenders have now adopted the following:

  • the maximum ground rent at the start of the lease term must not exceed £1000 a year;
  • the ground rent must not be capable of being increased during the first 21 years of the lease, and not more frequently than every 21 years during the rest of the lease term;
  • when the ground rent is reviewed, any increase must not exceed the higher of 100% of the ground rent payable immediately before the date of the rent review: ii) a figure increased in accordance with the equivalent percentage change in the Index of Retail Prices since the date of the previous rent review.
  • With a number of lenders specifically also saying they will not accept ground rent provisions that contain unreasonable multipliers (i.e. doubling every 5, 10 or 15 years)

How this affects Landlords on a day to day basis

Until there is a legislative change buyer’s solicitors must generally report the ground provisions to the lenders and ensure that the provisions are in line with any guidance that the relevant lender has issued and if they have concerns to take out indemnity insurance or seek to amend the lease.  In shared ownership leases, this doesn’t matter as much at the beginning as the lease contains the mortgagee protection clause, but if the ground rent continues to be charged following final Staircasing, then whilst it may not be an immediate issue, it could cause problems on final Staircasing if the tenant needed to re-mortgage to final staircase, as if the level of ground rent became excessive and affected marketability the tenant could have difficulty in obtaining mortgage finance or indeed selling the property on in the future.  This is therefore something that buyers solicitors are raising as an issue from the outset of transactions.

The way forward

They government is now looking to change the Housing Act 1988 legislation so that long leases are not caught by it, as the original intention of this legislation was not to catch long leases.  They opened a consultation in July 2017 which looked at the “unfair and abusive practices within the leasehold system” and published the results in December 2017 which confirmed that they would look to introduce the following measures:

  • legislating to prevent the sale of new build leasehold houses except where necessary such as shared ownership
  • making certain that ground rents on new long leases – for both houses and flats – are set at zero
  • working with the Law Commission to support existing leaseholders and make the process of purchasing a freehold or extending a lease much easier, faster and cheaper
  • providing leaseholders with clear support on the various routes to redress available to them
  • a wider internal review of the support and advice to leaseholders to make sure it is fit for purpose in this new legislative and regulatory environment
  • making sure freeholders have equivalent rights to leaseholders to challenge unfair service charges

How long this legislation will take to change though is not known at this stage and given the complexities involved it is thought it could take some time to come forward.

What can be done in the interim?

While we wait for legislation to change there are a number of ways that Landlords can ensure that the ground rent provisions within leases are acceptable to both Tenants and their mortgage lenders including:

  • Starting ground rents to be below the current AST thresholds (i.e. £250 outside of London and £1000 inside of London);
  • Capping ground rent increases at the above levels;
  • Ensure that any escalation provisions only provide for increases in line with RPI; and
  • Including provisions within the lease to deal with serving notice on any mortgagee before commencing possession proceedings

Whilst the above measures may not bring in the desired income from ground rents that it used to – Landlords should consider whether changing their ground rent policies to be in line with the government’s proposals, and in line with current CML requirements, therefore allowing properties to be occupied, outweighs the risk of properties being un-mortgageable and therefore unsaleable.

Kate Anderson 

01959 568034 or         

Escalating Ground Rent – What will the future hold?