This article was first published in City AM, Friday 18 August 2017
As you mention, the future of ground rent payable for new build flats is an uncertain one and subject to an eight week public consultation, which started on 25 July this year.
The Government is seeking opinion on limiting ground rents on all new residential leases (over 21 years) and also consulting on prohibiting the sale of new build leasehold houses. The consultation has been triggered by some well-publicised cases of extortionate rises in ground rent or the impact that the ground rent provisions contained within leases have had on the premium payable for the freehold of leasehold houses.
No doubt builders and developers will make strong representations against the Government’s proposal to reduce or limit new build ground rents.
You must first check how much the ground rent is for the property that you’re proposing to buy with the developer or its agents to see if it’s unreasonable. Start by requesting a copy of the draft lease and check the initial rent, how often it is reviewed and by how much. Then do the maths. An initial ground rent of £400, doubling every 10 years in a 125 year lease will result in a ground rent of £12,800 in 60 years’ time, for example.
Where a new lease is being granted, there is scope for your solicitor to renegotiate the ground rent (and possibly other terms of the lease).
Many lenders already have specific requirements regarding the initial and ongoing ground rent payable during the lease term. Other lenders will not lend where the ground rent provisions are onerous or escalate unreasonably or are not in line with the ground rent provision of other leasehold residential flats in the area; these are all strong arguments to re-negotiate the ground rent, as is the impending consultation.
Different geographical locations can command differing ground rents. You can expect to see high ground rents in new builds in prime central London, for example.
The proposed ban does leave existing leases subject to ground rent provisions in an unclear position, but a review to tackle existing onerous ground rent provisions is welcome by many in the resi property market.
The marketability of a lease with a reduced or nil ground rent compared with a reasonable ground rent, which reflects a lot of the existing leasehold residential market, should hopefully prove not to be too significant.