May 28, 2023

What is Ground Rent?

What is Ground Rent?

Are you considering purchasing a leasehold property with the intention of renting it out? If so, you might be wondering what is ground rent? Here our experts explain what ground rent is and how to find out ground rent on a property, whilst taking a look at the average UK ground rents, and recent updates to the law.

What is ground rent?

With a leasehold property, the freeholder owns the land on which the property is built, and the leaseholder has the right to occupy the property for a fixed period.

Ground rent is a fee paid by a leaseholder to the freeholder for the use of the land on which the property stands.

Ground rent can also cover the cost of maintenance and repairs to the communal areas of a building, such as hallways and lifts. The amount of ground rent charged will depend on the terms of the lease, the location of the property and its value.

What are average UK ground rents UK?

The average ground rent payable in the UK varies depending upon the location and value of the property. In some areas, ground rent can be as low as £50 per year, while in other areas, it can be £500 or more. The amount of ground rent payable can also increase over time depending on the terms of the lease.

There is also a term known as “peppercorn” rent. This means ground rent is a very low or a nominal amount.

If you’re wondering how to find out ground rent on a property before you commit to purchasing, the information can be found in the lease agreement, which you can request from the freeholder.

What is the ground rent scandal?

In the UK, prior to 2022, there was no set way to calculate ground rent and so freeholders were able to charge whatever they wanted. As a result, some freeholders charged excessive amounts of ground rent to increase their income.

The overcharging was known as the “Ground Rent Scandal” and led the government to introduce the Leasehold Reform Act 2022.

How do recent updates to the law affect ground rent?

Under this new law, the government stated that that ground rent for new leases was to be set as “peppercorn rent,” meaning there was no set value at all. This update in the law relates to new leases on brand new properties, a new lease signed on an older property, or the extension to an existing lease.

The new law also includes measures to make it easier for leaseholders to purchase the freehold property.

If a lease was granted before 30th June 2022, there is no ground rent payable unless the freeholder has sent a formal written demand for it. They can take legal action if you refuse to pay it.

Things to be aware of with ground rent

Whilst there are new laws in place to protect the leaseholder, ground rent does still exist and, as mentioned, under the terms of the lease, it can increase over time.

One of the most important things to look for is a built-in automatic rise of ground rent in line with the Retail Price Index (RPI) or Consumer Price Index (CPI). These automatic rises can result in the ground rent increasing significantly over time, especially during times when the RPI or CPI happen to be very high, making it difficult for some leaseholders to afford.

Not only does this affect the leaseholder, but it may well have a knock on effect on any tenants too.

Landlords for example will have to consider whether they absorb the rising cost of ground rent, or increase rental rates to help cover the costs. To do so will have implications for tenants in terms of affordability, and it could mean they start defaulting on the rent. This situation highlights the benefits of the ‘guaranteed rent‘ scheme, which offers landlords a safeguard by ensuring a consistent income regardless of changes in ground rent or tenants’ financial circumstances.

How can a guaranteed rent scheme help?

Understanding what is ground rent and how it can affect rental rates and affordability is important.

A guaranteed rent scheme, such as the one offered by City Borough Housing, can help by keeping costs to a minimum. As well as guaranteeing a fixed rental rate, even during void periods, the scheme takes things like maintenance and repairs, everyday tenant management, interim inspections and tenant sourcing and bundles them into the package, so that there is nothing extra for the landlord to pay. We’ll also return the property to you in its pre-let condition at the end of the agreement, less fair wear and tear.

To find out more about a guaranteed rent scheme and to request your free rental valuation, please get in touch with our knowledgeable team.

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