Ground rents in long leases of new-build flats and houses are big business. Developers such as Taylor Wimpey and Bellway Homes have recently been in the limelight over the sale of long leases of new-build flats and houses which contain ground rents that double every 10 years.
What seems like an affordable ground rent of £1000 per annum will increase to £2000, £4000, £8000 in a matter of 40 years. The owners of newly developed homes, bought in the last 10 years, claim that they were not told about the ground rents or did not understand the figures when they bought their properties.
Additionally, developers like Taylor Wimpey have now sold on the freehold interests in these properties to private companies that collect the valuable ground rents and will only sell the freehold interest to the homeowner for an inflated premium. This effectively make the homes unsaleable as lenders will not offer a mortgage against a long lease with a ground rent that increases at such as alarming rate.
In response to the media attention, the developers are stating that the ground rent clauses were clearly stated in the long leases purchased by homeowners, and that the clauses are not illegal. There is nothing “illegal” in granting ground rents that regularly increase, but the practice is now being described as a national scandal and has recently been debated in the House of Commons. So where does the concept of ground rents spring from?
Originally, ground rent was supposed to reflect only the value of the “ground” that was being let, ignoring any building on it. The term is now frequently used to mean a low or nominal rent, usually paid under a long residential lease granted in return for a premium. The landlord gets a capital sum for the lease, so there is no reason for the tenant to pay a full “market rent” for the property. Often, the ground rent is simply a convenient figure, and has little bearing on the value of the land.
For the private companies that buy the freeholds of large numbers of new-build flats or houses, this is a safe long-term investment. As the value of the ground rents increase, so too does the value of the reversionary freehold interest. Individuals are now finding they are unable to afford to buy the freehold interest in their home and feel aggrieved that their flat or house will end up reverting back into the ownership of a private company in say 150 years’ time.
The moral of this story for buyers of new build homes to is make sure that you carefully read the fine print of clauses covering ground rent (or service charge) in long leases before you sign on the dotted line.
Make sure you get clear legal advice on the effect of any increases in ground rent and how frequently the increases occur. Also ask for legal advice on the process and figures involved in purchasing any remaining freehold interest in your home, as you may well wish to do so in the future.
Jennifer Chappell, Senior Associate at Bircham Dyson Bell
