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Grounded – Government takes aim at the “PPI of the housebuilding industry”

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By Adrian Price

The UK Government has launched a consultation into perceived unfair practices in the English leasehold market, seeking views on the possibility of restricting ground rents in newly established leases to a nominal sum of £10 per annum.

Ground rent – named to reflect the landlord’s ownership of the ground beneath the tenants’ property – is an annual sum paid under some leases. Unlike service charges, which broadly reflect the costs a landlord incurs in providing services to a property, ground rent can be set at any figure and belongs to the landlord unconditionally.

Occasionally ground rent is set at a ‘peppercorn’, representing token consideration. The reasons for this can vary from a reflection that the leaseholder is the true beneficial owner of the freehold (common in flats where a freehold is owned by leaseholders as a group) to the purely symbolic. In practice, a peppercorn is not usually given to the landlord, though there are notable exceptions. The University of Bath holds its 140-acre Claverton Down campus on a 999-year lease from the local Council and presents a single peppercorn to the Chairman of the Council in a silver box as part of an annual ceremony [1]. In 2017, this tradition was bucked in favour of aerial delivery by a Red Devils skydiver. Symbolic rent does not have to be a peppercorn – The National Coastwatch station at St Albans Head is leased for one crab per year [2].

Typical ground rents are set at several hundred pounds a year but can also be RPI linked to prevent inflation eroding returns. It is common that they double or have stepped increases. Problems arise where ground rents cannot be easily established (for example where tied to market value) or where they are perceived to rise too much or too often: a £350 ground rent doubling every 10 years would reach an eye-watering £11,200 after 50 years and £358,400 after 100. The expectation is that such changes are flagged to clients and factored into valuations; sadly, this is not often the case.

Anyone hoping that a court would lambast such a clause will be disappointed to hear that similarly crippling provisos regarding service charge have been ruled perfectly valid and legal [3]. A recent increase in escalating ground rents like these have caused difficulties in selling or mortgaging affected properties with few willing to knowingly buy or lend against them unless at a massive discount (Nationwide will not mortgage properties where the ground rent exceeds 0.1% of the property value). The proposed cap would prevent new buyers from entering into extended leases subject to harshly escalating clauses.

Onerous clauses in leases should be identified and addressed with timely advice.

TWM’s Commercial Property team is 1 of 13 teams to be commended for the category of landlord & tenant in The Times Best Law Firms 2019 Guide featuring the top 200 out of 10,000 legal practices in the country.

[1] https://www.bath.ac.uk/corporate-information/the-story-of-the-university/

[2] https://www.nci.org.uk/stations/coastguard-history-st-albans-head 

[3] See: Arnold v Britton [2015] A.C. 1619

For further information, please contact adrian.price@twmsolicitors.com

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