Why are Leaseholds in the news?

20th March 2019

Why are Leaseholds really in the news?

Part 1: Ground Rent

I am a great fan of Leasehold Properties. That sounds controversial, so I’ll clarify.

I am a great fan of old Leasehold Properties.

You may have switched on the news recently and heard that Leasehold properties are to be the next PPI Scandal? That millions of homeowners are suffering due to intrinsic problems in our land registry system? That homeowners are being exploited and paying hundreds if not thousands of pounds a year to unscrupulous landlords?

That is correct.

What you are not being told, is that this is a recent phenomenon brought about by housebuilders to maximise profits; older properties do not suffer from this issue.

Housebuilders have, in recent years, made a mockery of the leasehold system. By building houses and selling them as Leasehold, they can impose ground rents when normally a house would not be subject to these.

To increase profits, they may use a doubling mechanism, both on flats and houses, which I explain below.

What is Ground Rent?

Ground Rent is rent paid under the terms of a lease by the owner of a building to the owner of the land on which it is built. This is effectively a Landlord’s profit for the use of the land and provision of services; for example, most Leaseholders don’t have to arrange their building insurance, it’s done by the landlord.

A Leaseholder may not have to worry about budgeting for structural repairs as the Landlord may collect a service charge from the Leaseholders to build up a reserve fund to cover major works.

Ground Rents are usually subject to review using several different methods, such as:-

  • Set increases on specific years. Many old leases work by have rent increase to a predefined level on a set year i.e. rent of £10 per annum rises to £30 in year 33 of the lease.
  • Reviewed yearly linked to RPI/CPI. This means the ground rent rises with inflation and should not increase to untenable levels. It can still be problematic if your rent starts fairly high. A lot of new leases have high starting ground rents such as £250.00. Older Leases tends to have lower rents such as £50 or £100.
  • Doubling every X years. This isn’t a problem if the doubling occurs every 20-25 years, which equates to a 2.8%-3.5% annual increase. But if doubling occurs every 10 years this equates to a 7.1% annual increase. This could cause the residents problems further down the line as the ground rent would get out of control.

Is this a Problem for me?

If the “Doubling every X years” rent review looks like it could describe your lease, you should review your lease urgently and seek legal advice. If your rent doubles every 25 years, you will not have a problem. But if you are one of the unlucky ones whose rent double every 10-15 years, it is time to take action.

The longer you leave it, the bigger the problem will get.

Does your Rent Double? If so, contact Burtons today for legal advice about what you can do before it is too late.