Confused over your doubling ground rent clause? Your not alone. There are estimated to be almost five million leasehold homes in England. That’s about twenty percent of the UK’s total housing stock.
Leasehold property ownership can be traced as far back as the 11th century and the Norman Conquests so it’s been going for hundreds of years and pretty much under the radar for most of that time.
But that changed with a bunch of greedy house-builders who sold properties to unsuspecting buyers with nasty ground rent clauses (that double).
This week we are going to take a look at what these clauses are, when they turn nasty and what you can do about it when they do.
Without further a do, let’s get in to it.
What is ground rent for anyway?
There are two types of property in the UK. Freehold and leasehold. If you buy a freehold property you own the land your property is built on.
If you buy leasehold property things are different. As a leaseholder, you still own your property but you don’t own the land beneath the bricks and mortar.
Instead, the land is owned by a freeholder and freeholders usually charge to let you use their land.
This means you pay ground rent to borrow (or lease) land from the land owner. It’s really that simple.
Now, some land owners don’t charge you to use their land, but most do and whilst you’ve probably heard about some new laws coming into play to put the kibosh on this, these only apply to new build houses.
In other words, they don’t impact existing properties (ie those 5 million properties we mentioned in the beginning) and they don’t impact flats at all whether new build or already built.
That’s a problem for expats, because a lot of us own flats. Leasehold apartments tend to be a less hassle than other types of property so make sense when you are living overseas.
So in all likelihood these new changes won’t impact you in the short term. We can only hope the new laws lead to the whole arrangement getting abolished someday in the future, but we aren’t there yet, and there’s no guarantee we will get there any time soon.
Time to read your lease
On the face of it, the main difference leaseholders face is they have to pay service charges and ground rent.
Service charges go towards the day to day upkeep of the wider development. Cleaning communal areas, security, building insurance and the like. Ground rent simply covers your payment to your superior landlord for use of their land.
In the scheme of things, ground rent payments usually pale in to significance when compared to service charges or at least they did, back in the day before the greedy developers uncovered a new way to make money from leaseholders.
You see all these leasehold properties have lease agreements and these usually contain some ground rent rules.
Typically, there will be a paragraph or two explaining how much ground rent is to be paid and when.
If you are one of the lucky ones that will be about it, but unfortunately for many there will be a sentence or two explaining when your ground rent increases and by how much.
And here’s where the problem lies.
So much so that this has become a hot topic in recent years because some of these leases contain a doubling ground rent clause which can get nasty if you aren’t careful.
Now, just to be clear not all doubling ground rent clauses are equal. Let me explain.
Doing what it says on the tin
A doubling ground rent clause does what it says on the tin. Your ground rent doubles over a set time period.
This can be anywhere between 5 and 50 years and it is this number of years that is critical to understanding how much of a problem your ground rent actually is. Have a look at the table below.
It shows what happens when your ground rent starts at just £100 and then doubles every so many years. We start with 5 and go up to 50.
| Year / Frequency | 5 years | 10 years | 15 years | 25 years | 50 years |
| 0 | £100.00 | £100.00 | £100.00 | £100.00 | £100.00 |
| 5 | £200.00 | ||||
| 10 | £400.00 | £200.00 | |||
| 15 | £800.00 | £200.00 | |||
| 20 | £1,600.00 | £400.00 | |||
| 25 | £3,200.00 | £200.00 | |||
| 30 | £6,400.00 | £800.00 | £400.00 | ||
| 35 | £12,800.00 | ||||
| 40 | £25,600.00 | £1,600.00 | |||
| 45 | £51,200.00 | £800.00 | |||
| 50 | £102,400.00 | £3,200.00 | *£800.00 | £400.00 | £200.00 |
| *stays at this level until year 60 | |||||
You don’t have to look at that table too long to see how this ground rent malarkey can become a problem.
It doesn’t matter that yours started low. If it doubles every five years you are going to have a serous problem pretty damn soon.
Now, the good news is, ground rent doubling every 5 years is very rare so in all likelihood you won’t be impacted by that (but if you are we are coming to some steps you maybe able to take later).
What is much more common, and what has triggered all the headlines is where you have an increase every ten years.
If that’s you, the good news is you are not alone. The bad news is, this is a serious problem. Spoiler alert! It’s a problem because a doubling every 10 years increases prices faster than we expect the price of other goods and services to increase. Here’s the long and short of it.
When 10 years matters
We’ve all heard of inflation. It’s in the very nature of the world that we live in that the price of things goes up gradually over time.
Things you bought in the past are likely to cost a lot more in the future. The only thing we don’t know is by how much.
And that’s because different products and services go up at different rates.
The good news with property is we have a long history of data that provides a good idea of what we can expect in the future. It’s not a guarantee but its a pretty good start.
In short, history shows UK house prices have gone up about 1% above inflation. Now, more importantly for us is how fast rent has increased. You’ll see why in a moment.
It turns out rent has matched inflation more or less over the long term and this is important.
It means if you are a landlord as long as your property costs don’t increase more than inflation your rental income should always be able to cover them.
This in turn means homeowners also want to keep their costs rising in line with inflation because otherwise they’d be better off renting.
And perhaps, most important of all is this. If something increases in line with inflation it doesn’t really get more expensive in relation to everything else. It stays the same. At least it feels like that.
And here’s the key. It means if you are happy with the ground rent on day one, you should be happy with it in X years time as long as the price hasn’t increased above inflation.
Prices rising above inflation feel expensive. Prices rising below inflation feel cheap and prices rises in line with inflation should feel just about right.
So the question then becomes how much is inflation?
How much is inflation?
Now, there are various measures of inflation out there, but perhaps the most common are the Consumer Price Index (CPI) and the Retail Price Index (RPI).
We’ll focus on RPI here for the simple fact that this is the measure that the property industry tends to use and it has become particularly important where ground rent is concerned.
This is because, increasing with RPI is becoming a common alternative to a doubling ground rent clause.
This is important in itself as many people are now faced with a choice between keeping their original clause or paying to change it to increase with RPI.
Though, to some, this will be an easy decision to make. For others it won’t be. Here’s why.
Why RPI increases don’t always make sense
RPI can be just about anything. According to Trading Economics it reached an all time high of 26.90% in August of 1975 and a record low of -1.60 percent in June of 2009 but has averaged 5.39% from 1948 until 2023.
Nobody knows what is around the corner, so nobody knows what RPI is going to be from one year to the next. We’ve just had a couple of double digits years and those proceeded a long period of low single digits but here’s the thing.
The best you can do is assume that over the very long term the long term average RPI will continue. Not, every year, but averaged out over decades.
In other words, in the absence of anything better assuming RPI rises 5.39% a year is probably as good a prediction as we are likely to get.
And that’s useful for us because it means we have a benchmark, which we can use to get a clearer idea of just what ground rent doubling actually means.
RPI vs doubling
Have a look at the numbers below. I’ve converted our doubling every so many years into an approximate annual percentage increase so that we can compare them more easily to an RPI increase:
5 = 14.9%
10 = 7.2%
15 = 4.8%
25 = 2.8%
50 = 1.4%
Hopefully, you can see that doubling every 15 years and above is less than our RPI number of 5.39% but doubling every 5 or 10 years is much greater.
In other words doubling every 15, 25 or 50 is probably okay financially speaking, but doubling every 5 or 10 years is definitely not.
Now I say financially speaking because any kind of doubling seems to cause a problem no matter what the frequency.
This has become evident in recent months as mortgage companies shy away from ground rents that double full stop.
They aren’t looking at how many years between the doubles because if they did they shouldn’t have a problem with 15 year doublings and above. At least they shouldn’t prefer an increase in RPI to a 15, 25 or 50 year double but the crazy thing is they do.
In fact, many mortgage companies won’t lend if there is a doubling ground rent clause in the lease, yet are happy to do so if the there is a ground rent increase with RPI.
And as we’ve already established. That makes absolutely no sense at all. In fact, it suggests they probably need to go back to school and take some basic maths lessons.
Rocket science
With a 15 year double your prices will increase 4.8% per year, whereas average RPI is 5.39%. It’s not rocket science.
And in fact, just about everyone should prefer the latter because it’s fixed. Just like people tend to pay a bit more for the security of a fixed rate mortgage. Stability means security.
You know exactly what you are paying so you can prepare for it. On the other hand, imagine if your ground rent suddenly increased by 27% in line with RPI one year? That could cause real issues real quick.
So the fact of the matter is, ground rent that doubles every 15 years would be better than increasing in line with RPI if it wasn’t for misunderstanding mortgage companies .
How ground rent impacts mortgages
And boy oh boy are these mortgage companies causing big big problems for some folk.
You see, if mortgage companies won’t lend money to buy a certain kind of property, in all likelihood the price of that type of property will be negatively impacted. This is because only cash buyers will be able to come up with the funds to make a purchase.
That’s not good. Not at all. Because the minute your property sale is restricted to buyers without mortgages, the number of people who can buy your property drops off a cliff.
Simple supply and demand economics mean your price will be impacted negatively almost immediately but there’s something even worse than that.
More often than not cash buyers tend to be professionals and professionals don’t usually buy with cash unless they can get a big discount. Professionals don’t fall in love with your house, they crunch numbers and won’t hand over their money unless the number crunching works.
The more those numbers work for them the less they’ll work for you.
And might I add selling it to a professional for a lot less than you were expecting could be the best case scenario.
The wrong property in the wrong area with the wrong ground rent clause in the lease could become pretty much unsellable.
It’s no surprise then, that many people have begun paying to change the wording in their leases.
And for sure, if your ground rent is doubling every 5 or 10 years that is almost definitely going to be worth doing.
In fact, if that means your property suddenly becomes mortgageable, it may even be worth it if your ground rent is doubling every 15 years or more.
But here’s the thing. In many cases it isn’t going to be worth it. Here’s why:
Other issues
Doubling ground rent isn’t the only thing mortgage companies don’t like. Unfortunately there are another couple of other factors that many people simply don’t know about.
- The ground rent should be limited to 0.1% of the property price
- The ground rent should be limited to £250 (£1000 in London)
Oftentimes both of these are asked for at the same time so it’s worth looking at each in a bit more detail.
The 0.1% ground rent clause
Let’s say you’ve got a property worth £100K. The minute the ground rent goes above £100 it becomes unmortgeable in many lenders eyes because it exceeds the 0.1% of value rule. It doesn’t matter whether or not there’s a doubling ground clause. It is unmortgageable period.
Of course not all lenders adopt the same criteria. Some lenders will lend when the figure goes above 0.1% but the fact some won’t will still put the breaks on some house price growth and could lead to all the problems we’ve been discussing.
Imagine being somebody with a 15 or 25 year doubling ground rent who pays to change the wording in their lease to increase in line with RPI.
In all likelihood you are going to be out of pocket twice. Once because you’ve had to pay a solicitor a few thousand pounds to get your lease changed. And then again, because you end up paying more ground rent with an RPI increase. Remember our best guess is that its 5.39% vs 4.8%.
Not only that, but you still have the problem that the minute your ground rent goes above £100 your property becomes unmortgeable in a lot of lenders eyes anyway.
In other words, you wasted your money big time.
The £250 ground rent clause
And now for our second issue: the £250 ground rent clause. Pay attention because this is a big one.
Thanks to a nasty clause in UK law, ground rents above £250 (£1000 in London) can be very costly in deed.
This isn’t some arbitrary figure. No sir. It’s part of UK law and absolutely key to understanding how bad a leasehold property can end up being.
Let me explain.
The minute your ground rent goes above £250, is the minute your lease could be considered an assured tenancy or AST.
Landlords will be very familiar with that name but no matter if you aren’t.
You don’t have to know what that an AST is. You just need to understand this. It means your superior landlord (freeholder) could evict you for being 3 months late with your ground rent.
You read that right. Evict you just like a normal tenant renting a house. The only difference being that house is yours or so you thought.
In other words, you could loose your bloody house over a £250 ground rent clause. It’s beggars belief really.
So much so that I find it very hard to believe that the vast majority of leasehold property buyers weren’t totally unaware of that risk before they made their purchase.
It begs the question what were all the original conveyancing solicitors doing when these houses were being bought. No wonder then, that some of them are getting sued as I write this. Whilst drastic you can see why. They should have seen this £250 risk a mile off.
Not only is it a risk you probably don’t want to take on yourself, but it is definitely a risk mortgage companies want to avoid.
The phrase wouldn’t touch it with a bargepole comes to mind.
When things get scary
So again, if the ground rent is above £250 or is likely to go above £250 in the future through an increase you’ve got a serious problem on your hands.
It doesn’t matter whether its a periodic doubling or RPI increase. All that matters is the property becomes harder to mortgage and when its harder to mortgage it becomes harder to sell. It’s really that simple.
Whilst I’m in danger of sounding like a broken record, I can’t help repeating this thought experiment once more.
Just imagine you paid to get your lease changed to increase in line with RPI only to find your property is unmortgeagable anyway due to another clause.
You will have totally and utterly wasted your money. Not only that, but this will be an especially bitter pill to swallow if your original lease had been a double every 15 years or more because you’ll end up paying more to boot.
Your new RPI increase means you pay more ground rent and your solicitors fees mean you end up paying to have to pay more ground rent. It’s ironic when you think about it.
I have no doubt that this is going to be a particularly sore point for many leaseholders right now.
That’s because any lease with a RPI increasing or doubling ground rent clause will get to £250 somewhere down the line. Most sooner rather than later. And that’s not to mention all those already there.
You don’t have to spend too long on Rightmove to see there are plenty out there.
At this point you may be forgiven for thinking there doesn’t seem to be any light at the end of the tunnel.
But fortunately there is.
Light at the end of the tunnel
The UK government is aware of this problem and have said they are going to do something about it. Here’s a quote from them:
The government is aware that, where ground rents exceed £250 per year or £1,000 per year in London, a leaseholder is classed as an assured tenant. This means, that for even small sums of arrears, leaseholders could be subject to a mandatory possession order if they were to default on payment of ground rent. The government will take action to address this loophole and ensure that leaseholders are not subject to unfair possession orders.
UK Government
Whilst there’s no timeline on the above, it’s definitely better than nothing.
Not only that but landlords take note. There is a caveat in the law that means the £250 clause is only relevant for people living in their own homes.
In other words, if you are a landlord renting your property out, you won’t be impacted by this, at least not until you want to sell.
What if that’s not you?
Don’t worry. You should have options.
First and foremost you can get yourself a solicitor or conveyancer to go through the process of what’s called a Deed of Variation.
Costs
In simple terms, a deed of variation means changing the words on your lease.
In theory you could change the lease from a double every X years to increase with RPI or you could change to keep the ground rent fixed at or below £250.
As we’ve already discussed, the increase with RPI change won’t make sense in many cases but the £250 (£1000 in London) limit just might.
The exact costs for this will depend on a whole host of things such as how much your solicitors charge, the value of your property, how long you have remaining on your lease but most importantly how much your (superior) landlord charges you for the trouble, because make no mistake they will want to make up for future lost earnings.
Now, if this isn’t overly expensive it could be worth doing, otherwise you may want to opt for another choice.
This is another topic that has pretty much stayed under the radar until now but has started to appear in more conversations more recently thanks to our ground rent issues.
The topic in question is the Statutory Lease Extension.
Statutory Lease Extension
A statutory lease extension quite simply adds 90 years to the length of your lease. Though some properties come with 999 year leases, most start with a number between 90 and 150 depending on whether you bought within or outside of London.
As a result that’s going to be a serious extension for most leaseholders.
In the past people didn’t usually consider doing this until their lease was getting close to 80 years due to Marriage Value which in layman’s terms meant having to spend a good deal more below that point.
But this doesn’t matter to us, what is important is that nowadays people are doing it to deal with their ground rent problems.
You see when you get a statutory lease extension you also get a peppercorn ground rent as part of the deal.
Peppercorn ground rent?
Now, what is a peppercorn ground rent I hear you ask?
Would you believe it is exactly how it sounds. Simply put, it means you have to pay the landlord one peppercorn each and every year of your lease.
Of course, no landlord is really going to come around to your house chasing you for a single peppercorn. It is simply a symbolic payment that acknowledges the landlord’s ownership that needs to be there for UK law.
And in reality, it means you effectively remove ground rent from your lease.
And here’s the best bit, as long as you have owned the property for two years or more, a statutory lease extension can’t be refused because it is a legal right.
That’s just to say your superior landlord must grant you this lease extension and must give you a peppercorn rent.
In other words, this just about solves all the problems we have been talking about it.
The only question is costs and for this you’ll need to speak to a solicitor.
If the cost isn’t that different from a deed of variation you’d probably be better off doing the statutory lease extension. If it’s a lot more expensive you’ll have a decision to make.
The bottom line
Doubling ground rent has become a major issue.
Lots of people are opting to pay for a solicitor to change the wording to increase in line with RPI. For leases with ground rent clauses that double every 10 years or less that could make sense.
However, for those that double every 15 years or more which is common it might not.
There’s a good chance RPI tracked ground rent will increase faster than ground rent that doubles every 15 years or more. Not to mention the fact an RPI increase could be anything from year to year whereas a double fixes what you owe.
Not only that, but your property could still be unmortgageable and hard to sell even if the ground rent goes up with RPI due to other ground rent rules. Namely these two:
- Ground rent shouldn’t be greater than 0.1% of the property value.
- Ground rent shouldn’t be greater than £250 (£1000 in London)
If your property fails either of these two or is likely to in the near future it maybe worth opting for a statutory lease extension.
With these you get to extend your lease by 90 years and get rid of ground rent all together all at the same time.