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Escalating Ground Rent Explained

Escalating ground rent clauses in leaseholds are now a major issue on re-sale and remortgage of property. Historically these were not thought to be an issue and thousands of Leases were drafted in this way. However standard practice changed in the last 5 years when it became apparent that these may lead to a title defect.

If your Lease contains the relevant escalating ground rent provisions then your leasehold matter will grind to a halt and you will need to fund a suitable indemnity insurance policy or arrange a Deed of Variation with the freeholder and Management Company. Either option will cost you but there is no way around this as lenders will not lend on affected properties without one or the other. Indeed some lenders will only proceed if a Deed of Variation is drafted. This is a Deed which amends the Lease terms and is read with the original Lease. It will remove the title defect.

Your conveyancer will liaise with the freeholder and Management Company to negotiate the terms of the Deed of Variation. All parties must approve and agree the Deed before signature. This takes time as several parties are involved.

Indemnity insurance is a lot quicker and only requires input from the seller and buyer. It involves a one-off premium and can be put in place quickly. It does not resolve the issue in the way a Deed of Variation does. It provides insurance based on set circumstances and conditions must not be breached or the policy is invalidated. It will pass to new owners.

Whether a Deed of Variation or indemnity insurance policy are obtained there will be additional legal fees involved.

What Are Escalating Ground Rents?

Historically we have seen higher ground rents introduced alongside escalation clauses (ground rent reviews). These cause the ground rent to increase or escalate, sometimes doubling very quickly. The ground rent can escalate to thousands of pounds in a relatively short period. The result is financial distress to leaseholders who struggle to sell properties. Lenders do not like these escalating ground rent provisions as they affect saleability so the property is less attractive as security for the mortgage.

Where ground rent exceeds £250 annually (£1000 p.a. in London) a lease may, due to the Housing Act 1988, be classed as an assured shorthold tenancy (AST). If the lease is classed as an AST, the leaseholder is vulnerable to a mandatory Ground 8 possession order if the ground rent falls into arrears for three months. If the lender were to repossess they are also affected. This is why it is a title defect and lenders do not like it. It affects their security.

Where this applies a court will have to grant to the landlord a possession order on request.  This means that not only does a leaseholder face losing their home, they will also forfeit (or lose) the purchase monies paid when acquiring the property. Lenders taking repossession proceedings will also face losing their security (I.e. the property).

As a result escalating ground rents have an adverse effect on both the mortgage-ability and saleability of leasehold properties.

There has been widespread criticism of the conveyancing profession over escalating ground rents. However, these were considered normal and acceptable until relatively recently (approx 2018).

Blame your conveyancer

It is worth noting that the nature of standard practice and current conveyancing procedure is that it changes over time. Perceptions change. Case law reveals issues and practice evolves. Unfortunately Conveyancers are an excellent scapegoat. Whereas in reality, they acted on client instructions and in a way that was standard practice.

I have included below comments posted on LinkedIn in support of a beleaguered profession. Bear in mind that a solicitor only does what it is instructed to do by the client seller or client developer who wanted these ground rent terms and wanted ground rent income post completion.

Blaming conveyancers



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