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Ground Rents

Ground rents have always been a feature of leasehold life in England and Wales. Although something of an historic anomaly - (there is no legal requirement that a long lease should have a ground rent), residential leases have traditionally contained these.

As interest rates have fallen, the value of the 'rock solid' contractual income from a portfolio of ground rent has become more and more sought after by longer term investors looking stable income.

So far, so good? The 'small' value of the ground rent generally doesn't bother the individual flat owner and this is often seen as a slightly anachronistic consequence of owning a leasehold flat and that has tended to be that.

However, has the pendulum now swung too far the other way?

Rising ground rents have been a feature of lease renewals on a voluntary basis for some years and if the rises are not too aggressive and do not adversely affect the value of the property, then quite arguably there is no harm in them. If there is to be a rent and it is to have continuing value over time then it will need to rise to take account of inflation.

However, the situation appears to have been seen to be open to abuse, you may have read about the recent developments concerning the 10 year doubling rents - in which the compounded effect of the increase has the effect (in extreme cases) of wiping out the value of the property.

If the rent doubles at too regular an interval and does so in a way that means that each increase is extreme, it is not too hard to see that within a fairly short space of time the rent may reach an excessive level.

A lot of media attention has focused recently on leasehold houses.

In the north of England these have often been historically sold as leasehold. Greed seems to have taken over with some developers - to the extent that they have created a secondary income stream by pre-selling the ground rent income for a further profit, leaving the owner of these leasehold houses needing to pay tens of thousands of pounds if they wished to purchase the freehold.

The point has been debated in parliament - and been mentioned in passing in the government white paper on housing.

The latest is that Taylor Wimpey have set aside £130m to deal with the problem - albeit in the case of new build properties only.

In addition the Nationwide Building Society has indicated that it will not lend on aggressive rents.

What appears to be clear is that come the election, some further parliamentary time may well be devoted to this issue and that rising rents as a feature of the long lead may become a thing of the past.

Certainly, the recent government White Paper on Housing - does mention this issue:

“4.37 In particular, ground rents with short review periods and the potential to increase significantly throughout the lease period may not be offering a fair deal. We are absolutely determined to address this. We will therefore consult on a range of measures to tackle all unfair and unreasonable abuses of leasehold.”

Will there be legislation to restrict or remove ground rents? We will have to wait and see.

Mark Chick is a specialist leasehold property solicitor and head of the Landlord and Tenant Team at Bishop & Sewell LLP, a firm of solicitors based in Central London. He is also a director of ALEP (the Association of Leasehold Enfranchisement Practitioners).