Ground rent on our leasehold flat is set to double: Does it make it unsellable?

I’m in the process of selling my leasehold flat that I purchased new in November 2015 using Help to Buy and a mortgage from Nationwide.

My purchase price was £249,500 and unfortunately it is now only valued at £230,000 which is what I currently have it under offer for – despite making numerous improvements to the property.

I paid off my Help to Buy loan in 2021 with cash and remortgaged the property in November 2022 with Santander.

I have now been told by my solicitor that my sale is in danger of falling through as my buyer’s mortgage lender (unspecified although suspected to be Nationwide) do not allow a clause in the lease (from home ground) where the ground rent doubles every 10 years as this doesn’t confront the now acceptable requirement of ‘peppercorn rent only.’

Leasehold nightmare: The buyer’s mortgage lender won’t adopt a clause in the lease where the ground rent doubles every 10 years

During my time living here I have paid £250 per year rent and have just been notified that from January 2024 this will be £500.

Please help. I accepted the offer on my property on 28 May and this has only just been identified. 

There is no chain to my sale and I have already signed a tenancy contract for a new rental home at nearly £2,000 per month and absolutely cannot afford this plus my existing mortgage should the sale collapse.

Ed Magnus of This is Money replies: This would likely give anyone reason to panic.

Some leaseholders have found themselves trapped in homes with increasing ground rents – some which double every 10 years and others that boost in line with the Retail Price Index, currently 6.1 per cent. 

Fortunately, after advance correspondence with you, we established the lease states the ground rent will boost by £250 every 10 years – not double.

This is good news and will mean your ground rent doesn’t have the potential to snowball from £250 to £500 to £1,000 to £2,000 to £4,000 to £8,000 over the next 50 years and so on. 

The £250 increases in the future won’t feel as dramatic either given inflation will erode the value of £250 over time. 

For example, 10 years ago, £178 will have purchased you typically the same amount as £250 will get you today.

Leaseholders do not technically own the ground their property is built on, and as such many leases include a ground rent to be paid to the freeholder each year

However, what matters is whether this specific clause will be accepted by mortgage lenders and mean your home is not rendered both unmortgageable and potentially unsellable.

Despite you discovering the ground rent isn’t in fact doubling every ten years, your solicitor has advised that this is still not acceptable to your buyer’s mortgage lender. 

Your solicitor has suggested the buyer looks at using a different mortgage lender – but has also said there’s no assure the clause will be acceptable to other lenders. 

In terms of the tenancy agreement you have now signed, if you think your sale will be delayed, it would be worth contacting the letting agent or the landlord directly to see if you can either delay the start date or cancel the contact altogether.

If you explain to them what has happened, they might be prepared to be understanding and reasonable, particularly if they are worried you will not be able to pay the rent. 

Alternatively, you could look to let your property on a short-term let to help you handle the short fall. Albeit, be careful, as many leases also forbid short-term lets.

For expert advice on the matter we sent our reader’s lease to Clive Scrivener, a chartered surveyor and Rics registered valuer at Scrivener Tibbatts and a member of the Association of Leasehold Enfranchisement Practitioners (ALEP).

We also spoke to Chris Sykes, technical director at mortgage broker, Private Finance for their expert mortgage advice.

What are your thoughts having read the lease? 

Clive Scrivener replies: You purchased your flat when the property market was at its height and its fall in value is not unusual

But you have done very well to pay off your Help to Buy loan and to remortgage just before interest rates rose.

You mentioned that your lease has a ground rent which doubles every 10 years. However, my review of your lease shows that the ground rent in fact increases by £250 per annum every 10 years of the term.

Clive Scrivener , a chartered surveyor and Rics registered valuer, says the management company has previously agreed informally to amend ground rent clauses which are now ‘unmortgageable’

You might want to raise this with the solicitor that you used when you purchased the property, as they should have made you aware of this clause and its possible implications.

Lenders’ criteria, appreciate the market, has changed in the last 10 years and many have changed their criteria on ground rents. specifically those that have review periods under 20 years.

The management company, Homeground, have previously agreed informally to amend ground rent clauses which are now ‘unmortgageable’. 

Homeground’s website confirms they have done this on an estate where the leases were originally granted by Countryside. The new review to the rent would be a review linked to the RPI every 20 years of the term. 

There is no assure they will agree to this on your estate and or whether they will demand you to pay a premium value. 

In your case the developer was Persimmon Homes and Homeground may have a similar arrangement with them.

You accepted an offer in May but unfortunately have only just become aware of this situation. This is something that your current solicitor should, possibly, have flagged early on.

What options does our reader have? 

Clive Scrivener replies: You have a number of options.

One, ask Homeground for a Deed of Variation to the ground rent clause to be reviewed in line with the RPI every 20 years. This should be acceptable for mortgage lending – but check this with Nationwide.

Two, serve a Section 42 notice of claim under the Leasehold Reform, Housing & Urban Development Act 1993 to extend the lease by a advance 90 years and have all ground rents reduced to a peppercorn. 

This will cost you in fees and also in the premium payable to Homeground, but it might be that you can pass these costs to your purchaser.

Option three. Instruct a solicitor to probe a potential negligence claim against your conveyancing solicitor, as they might agree to cover the costs of a ’93 Act lease extension. This could take some time, possibly years, though.

Option four. Agree to sell the flat at a discount to ponder the need to extinguish the ground rent.

All of the above is of course subject to review and obtaining professional advice from a suitably qualified surveyor and solicitor.

Is this property unmortgageable?

Chris Sykes replies: The norm as far as I grasp is for ground rents to boost by an index, usually RPI every 10 years. 

From time-to-time we come across issues where the ground rents double, or the ground rents are set to change on a fixed scale every five years.

Mortgage expert: Chris Sykes thinks that some lenders will be happy to proceed with this ground rent clause

In this case, where the ground rent increases by £250 every ten years, there will be more lending options available to your reader. 

After a certain amount of time it’s better to be increasing by £250 every 10 years than doubling every ten years. 

If it were to go up in line with RPI (inflation) for example, there is a greater chance of it increasing by a larger amount over a 10 year period.

Not every lender will be happy with this clause however as it’s a bit unusual, but I have seen similar clauses in the past and I know of some lenders that will be perfectly happy to offer a mortgage. 

However, it may be that they will want a deed of variation. If so, your freeholder might potentially adopt such a ask. 

If this ground rent clause is diminishing the value of the leasehold properties within the block they might be willing change the terms to avoid this becoming a administration headache with every single leaseholder.

What if the ground rent doubles every 10 years? 

Chris Sykes replies: Getting a mortgage becomes particularly difficult if the ground rent is doubling every 10 years.

I’ve seen doubling ground rent every 20 years not being an issue but every 10 seems a bit too extreme for lenders. 

Where I have seen these cases before it is generally the case that freeholders are now familiar that the flats are hard to sell or remortgage when the ground rents double and they will adopt a deed of variation (sometimes for a small fee) to change these terms to a more standard term.