Ground rent is likely to become an increasing problem for housing developers who have used leases where the ground rent is increased by a large multiplier on a regular basis.
Residential Leasehold titles are common but are often far from straightforward. A long lease is, after all, nothing more than a long tenancy. In order to protect owners of residential leasehold titles, successive governments have legislated constantly to try and protect leaseholders from the insecurity of not owning the property outright –granting rights to extend the lease, to purchase, to manage, to acquire commonhold, to regulate service charges and so on and so forth.
For housing developers, granting a leasehold rather than a freehold title can be attractive as the retained freehold has an investment value for the developer. However, it also presents problems. One issue which has recently been highlighted is that of the ground rent which a leaseholder will have to pay. Ground rents are typically low – perhaps £250 per year, but the lease will contain provisions for it to increase over time.
Here’s the problem: It’s hard to establish a method for increasing the amount of ground rent a leaseholder must pay in a way that is both reasonable and fair. This problem becomes even harder to solve when you take into account the long life of some leases.
An increase requiring rent to be assessed will be costly to implement and so a formula for increase is needed. An increase by reference to retail price index (RPI) or consumer price index (CPI) works only as long as those indices exist. If the lease will still be running in 100 years’ time, that cannot be guaranteed.
In an effort to simplify, some developers have been using a formula simply doubling the ground rent every ten years. That might not sound too bad initially, but once you do the maths you see that a 125 year lease starting now with rent of say £295 will have an annual rent in excess of £1.2 million by the time it reaches its end.
That is the equivalent of inflation running at 5.2% annually throughout that time. Over the past 100 years inflation has averaged 4.5%. It is difficult to anticipate what property and rental values will be in 100 years’ time.
However, several mortgage lenders are so concerned that they have decided to restrict lending on leasehold properties where the ground rent is greater than a certain proportion of the premium, or where there is a large multiplier for rent review.
This means that anyone who owns a lease on similar terms will soon find that their property is unmortgageable and/or unsaleable. Numerous owners have already discovered this to be the case.
Any developer who has used ground rent increase clauses with a significant multiplier will need to develop a clear strategy in order to be ready to deal with queries and concerns. This may not be straightforward – particularly if the freehold has been sold on – but is essential. References to this being “the PPI of the building industry” might not be wholly overstated.