Understanding Onerous Ground Rent and Lender Criteria
Mortgage lenders have adopted a variety of tests to assess whether ground rent terms are acceptable. The most widely used test is that ground rent must not exceed 0.1% of the property value (sometimes expressed as the ground rent must not be more than one-tenth of one percent of the property's market value). For a property worth £300,000, this equates to a maximum acceptable ground rent of £300 per year. Ground rents above this threshold may cause a lender to decline or impose conditions.
The UK Finance (formerly Council of Mortgage Lenders) and many individual lenders have also introduced rules around ground rent escalation clauses. Doubling ground rent clauses (where the ground rent doubles at specified intervals) are particularly problematic because the future obligations are unpredictable and can grow to very large sums. A ground rent of £250 per year that doubles every 10 years would reach £8,000 per year after 50 years and £128,000 per year after 90 years, which clearly renders the property unmortgageable at that point and severely restricts the pool of buyers and lenders throughout the lease term.
Review of inflation-linked escalation (for example, ground rent linked to the Retail Price Index) is more complex. Many lenders will accept RPI-linked ground rents provided the current ground rent is below their threshold and the starting figure is not onerous. Fixed increases to specified higher amounts are assessed on the future ground rent level as well as the current one, which means a ground rent of £100 per year increasing to £500 per year in 2030 may already be deemed onerous even if the current payment appears modest.
The Leasehold Reform (Ground Rent) Act 2022
The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022. It makes it unlawful for landlords to charge a ground rent above a peppercorn (i.e. anything above zero) on new regulated leases of dwellinghouses and flats. The Act applies to all new regulated leases granted after commencement and also to statutory lease extensions obtained through the Leasehold Reform Act 1993. This means that if you exercise your right to extend your lease under the 1993 Act, the extended lease must be granted at a peppercorn ground rent, even if your existing lease has an escalating rent.
Exercising your right to a statutory lease extension is therefore a powerful remedy for leaseholders with onerous ground rent terms. Not only does a statutory extension add 90 years to the existing lease term (making it much longer and therefore more valuable and mortgageable), it also resets the ground rent to a peppercorn for the extended term. The combination of a longer lease and zero ground rent addresses both of the most common mortgage obstacles facing leaseholders with problematic leases.
The cost of a statutory lease extension depends on the unexpired lease term, the current ground rent, and the property's value. The premium is calculated using a statutory formula. Before the 2022 Act, the freeholder was entitled to the "marriage value" element when the unexpired term fell below 80 years, which could make extensions expensive. Under the Leasehold and Freehold Reform Act 2024 (which was passed but whose full implementation is ongoing), marriage value is to be removed from the calculation, which should make extensions more affordable for many leaseholders.
