What is Ground Rent?

People who buy leasehold properties in England and Wales have to make regular payments to the freeholder or landlord of the property. This is because a leaseholder only owns the property, not the land the building occupies. These payments are known as ground rent. In this guide, we’ll explore what ground rent is, why and when you pay it.

Recent legislation has come into force in England and Wales which significantly affects the power of freeholders to charge ground rent, and we will look at this too.

Why do you pay ground rent?

If you pay ground rent, you own your home as a leaseholder, but you don’t own the land. The reason you pay ground rent is to rent the land on which your property sits. The latest figures report that nearly 5 million households in England and Wales own their homes on a leasehold basis. Most flats in England and Wales are owned leasehold, and around 8% of all houses.

Traditionally leaseholders have paid ground rent annually to the freeholder of the property. Freeholders are often the company that developed the property or own the land, operating through a management company, and they grant leases of a fixed length to the people who bought the individual flats or units of accommodation. Leases are usually 99 years in length, which sounds like a long time, but can eventually have legal implications.

The freeholder is responsible for the maintenance of the land and the exterior and communal parts of the building. This is what ground rent is intended to fund, but the terms of a lease do not have to explicitly say what the ground rent pays for. Find out more about the differences between freehold and leasehold properties.

What’s does ground rent cover?

Ground rent costs typically include any maintenance and repair of the structure of the building and any common parts (like guttering), the cost of the building’s insurance and maintenance of any communal grounds or private accessways.

The lease will outline exactly what is and isn’t covered, so check it carefully.

What has changed about ground rent?

A major piece of legislation came into force in England and Wales in 2022 that scrapped ground rent for new leasehold properties. The Leasehold Reform (Ground Rent) Act was the result of many years of campaigning by housing organisations, which called for a fairer system for leaseholders. Under the new law, ground rent was ended for new residential long leasehold properties with leases that began after 30 June 2022. Instead leaseholders pay a peppercorn rent to the freeholder, which means they effectively have no financial value.

Ground rent for leases predating 30 June 2022 still have to be paid. These are now known as ‘unregulated leases’.

What is a peppercorn rent?

In the past freeholders would ask for a peppercorn, as a physical symbol to enforce the terms of a lease and make it legally binding. The term ‘peppercorn rent’ can now apply to a very low or nominal amount of ground rent. Today it may mean the payment of a penny or a pound. It has no financial value but it means that the responsibilities of a lease still exist for the freeholder. It is up to the freeholder to decide whether to still ask for the nominal payment, but the Leasehold Reform (Ground Rent) Act bans any administration charge relating to the collection of a peppercorn rent.

How much ground rent will you need to pay? Is it monthly or yearly?

For unregulated leases, ground rent is still enforceable. How much ground rent you pay varies depending on the type and location of the property. It is usually a fixed fee between £100-£250 per year, but it can also be charged as a percentage of the property value.

Leaseholders typically pay ground rent annually, but it can also be paid every six months or quarterly (every three months).

Fixed and escalating ground rent

There are two basic types of ground rent:

• Fixed Ground Rent, which remains unchanged during the term of the lease
• Escalating Ground Rent, which will increase during the term of the lease

Your lease agreement must provide the following details:

• The term of the lease
• Type of ground rent
• The amount you will pay
• If it’s escalating when it will increase and by how much

Ground rent review

There are some clauses that can be included in a lease that allow for a review of ground rent periodically, for example, every 5, 10 or 25 years. Typically, the review clause allows the freeholder to increase the ground rent at each review.

Can ground rent increase/decrease?

If your lease pre-dates the terms of the Leasehold Reform (Ground Rent) Act 2022, your ground rent could still be increased. It doesn’t usually get reduced, but you might be able to become a freeholder. Whether or not you will be able to do this will depend on your particular situation. If you live in a flat, at least half of the other leaseholders will need to buy the freehold of the building to make this possible.

If you are interested in buying a share of the freehold, it is best to seek legal advice as it is a complex process.

We’re on a mission to get you moved

At haart, we understand the buying and selling process, which means we can support you while you do both, even if it’s a leasehold property. If you are thinking of buying, get in touch with your local haart branch today.