Owning a leasehold property comes with a few inconvenient costs.
One of the most well-known examples is ground rent.
If you’re wondering what ground rent is, you’re in the ideal place.
We’ve given a clear summary of this subject below.
What is ground rent?
Ground rent is a payment made by a leaseholder to a freeholder.
Its technical purpose is for the leaseholder to pay for the land underneath their property, which the freeholder still owns.
Ground rent only applies to leasehold properties. You won’t pay it for a freehold house.
Ground rent vs service charge
Ground rent is often mistaken for a service charge, but these are separate things.
Ground rent payments are made yearly to the freeholder. Some experts even argue that it is essentially symbolic.
The freeholder owns the land beneath the building and thus wants compensation for allowing someone to lease on top of it.
But the money does not go towards anything substantial. It is the service charge used to maintain common areas, such as halls, lifts, carparks, etc.
How much is ground rent on average?
Most sources state that ground rent is usually between £200 and £500 per year. The price might go higher in popular London locations.
The freeholder determines the ground rent figure. They can technically make it as high or low as they want.
However, they are unlikely to receive interest if the number is too expensive – especially since it doesn’t hold much practical value.
Can a landlord increase my ground rent?
Yes, a landlord can increase your ground rent. Your signed lease agreement will usually outline the conditions in which they can do this.
Most contracts will state how often ground rent can be increased and by how much. This is why you should get legal support and read a lease agreement carefully before you sign it.
Ground rent may be used as a negotiating tool over lease extensions.
For instance, the price of the extension, or how much it can be extended by, may sometimes come hand-in-hand with a change in ground rent.
You should get guidance from a solicitor if you still need clarification.
Can I avoid paying ground rent?
When you sign a lease agreement, you must adhere to the terms. This means that if you have agreed to pay ground rent, you must do so.
You can avoid paying ground rent by buying a share of freehold. This is when multiple leaseholders in a building join together to co-own the land underneath the property.
The freeholder will sell the freehold to you all for a price. Once this happens, you can stop paying ground rent if everyone agrees.
Ground rent is sometimes used as a bargaining chip in negotiations between leaseholders and freeholders.
You could get a solicitor to help draft a Deed of Variation, which changes the terms of your lease.
This might include abolishing ground rent. It only becomes binding if your freeholder signs it, though.
What is peppercorn ground rent?
Peppercorn ground rent means that the amount a leaseholder must pay is minimal and almost non-existent.
Peppercorn ground rent is common in long leases.
It is often around £1 per year. It is used to ensure that the lease agreement is still legally sound.
Does buying the freehold avoid ground rent?
Most of the time it does, but there is one exception.
You won’t pay ground rent when you buy the freehold of a property and own it outright. You are not answerable to someone else and thus the cost can be abolished.
If you buy a share of freehold with other leaseholders in the building, you will collectively decide whether to remove ground rent. Most of the time, people agree to do this.
But there are some occasions when co-owners pool a ground rent type payment.
This can then be used as an emergency fund. For instance, in case something expensive – such as the foundations of the building – need correcting.
Is ground rent going to be abolished?
The Leasehold Reform (Ground Rent) Act 2022 is now law in the UK. It aims to give leaseholders more power and control.
One of the changes in this act is to end ground rent. This applies to most new extended residential leasehold properties.
It also includes a legal right to buy out the ground rent without extending the lease simultaneously. Any freeholder who fails to comply could be fined up to £30,000.
However, most existing leaseholders still have ground rent on their properties.
It is expected that the law will slowly be phased in for these people as the years pass. Check the government website for more details.