We found a buyer for our leasehold flat, but on the day of exchange their lender declined to offer a mortgage, despite having previously agreed in principle. The reason was a provision in the lease for the ground rent, currently £200 per annum, to be amended every 25 years according to the market value of the property. We had no trouble securing a mortgage when we purchased the property, and it has not prevented sales of other flats in the building. We have subsequently spent thousands in legal fees trying to secure a deed of variation on the leasehold agreement to amend the ground rent clause but this has been endlessly held up by the freeholder. We now stand to lose our onward purchase.
RC, London
You and your buyer have fallen victim to an iniquitous money-printing licence that lines the coffers of speculators. Ground rent is an annual fee paid to a freeholder to “rent” the plot of land on which the property is built. Formerly it was a token amount, but in recent years it’s become big business. Some ground rents of newer developments are allowed, by small print in the lease, to double every 10 or 20 years, or, in your more unusual case, to rise with the value of the property. Developers can make big profits by writing onerous clauses into the leases, then selling the freehold to investors, who are guaranteed an income stream in return for nothing at all.
Campaigners urged the last government to cap existing rents, which can cripple unwary buyers, but their demands were omitted from the leasehold and freehold reform bill, which became law in July. However, another piece of legislation, the Leasehold Reform (Ground Rent) Act, prohibited monetary ground rents on leases issued after 2022.
According to Sebastian O’Kelly of the campaign group Leasehold Knowledge Partnership, it’s a lease extension, rather than a deed of variation, that you need – a point you may want to explore with your own solicitors. A lease extension is a whole new contract and since ground rents are now forbidden in new leases it would mean the new owner wouldn’t have to pay anything – but it costs a lot, as you have to pay the freeholder for the extension as well as a lawyer to draw it up.
“This is an example of the property sector dumping new homeowners into highly complex ground rent terms,” he said. “The dozy banks that initially lent on these properties have now woken up to the implications of highly aggressive lease terms. The obvious question is: why did they not spot these rip-offs when the leases were first sold and tell the housebuilder to rewrite them or they would not lend?”
It’s unsurprising that your buyer’s bank was nervous. Who, for instance, gets to decide on the market value of the property when the time comes to re-set the rent? The banking trade body UK Finance says that lenders are required to assess onerous lease terms that could affect borrowers’ ability to repay a loan or the future saleability of a property. A good conveyancing solicitor should point out the potential impact of extra costs such as this.
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