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"THE GROUND RENT SCANDAL - The PPI of the building industry?"

November 2017

Historically, leasehold property owners usually paid a peppercorn ground rent, sometimes as little as £1 a year. Many freeholders didn’t bother to collect it. In the last ten years, developers started to put clauses into leasehold contracts where the ground rent escalated, or doubled regularly - usually every ten years. This was to maximise the income the developers obtained. Typically these clauses were included with new build, relatively low value houses. Generally they were leasehold houses rather than flats.

Not many homebuyers – or their solicitors – took much notice of the escalating ground rent clauses. They only looked at the starting rent. It’s all a long way in the future, isn’t it? But these clauses meant that the ground rent would soon spiral to absurd levels.

Here is a typical example of a doubling rent clause:

"Annual Rent: £100 per annum until 9 November 2027, £200 from 10 November 2027 and doubling every 10 years thereafter.”

Based on the above, if you stayed in your for home for the next 70 years, the doubling ground rent would result in an annual bill of £12,800. A substantial amount to pay every year out of your pension during your retirement.

At 120 years, the ground rent would rise to an incredible £409,600 a year. An alarming amount for a new owner to take on board.

At 240 years we arrive at “£1,677722e9”, at which point a 999 year lease isn’t really a 999 year lease when the rent can’t possibly be paid.

The developers knew this. The unfortunate buyers and their solicitors presumably did not. While this scenario is based on £100 a year, there are a significant number of properties which have an initial rent of £1,000.

Some commentators argue that doubling clauses are only there to provide for the effect of inflation, but certainly not any inflation rate we’re ever likely to see in the UK.

Press reports suggest that leases of affected properties have been valued at nil and may be unsellable. Mortgage lenders are in the process of changing their rules to make it impossible for these properties to get a mortgage.  

To make matters worse, many of these leases have been ‘commoditised’ and sold on by developers to offshore investors as an income stream.

The government has promised a total ban on these lease clauses. This has not yet been introduced. It is unclear what will happen to the existing leases.

This is still going on now, today, all over the country. As recently as October 2017 this firm advised a client not to sign up to a ground rent doubling clause – under any circumstances! – on a leasehold property in Suffolk.

If you have been affected by the issues in this article, or know someone who has, contact Michael Large at Prettys Solicitors on 07387 411402 for a confidential, no obligation discussion, or email groundrentaction@prettys.co.uk

Mike Large

Michael Large

Solicitor

e mlarge@prettys.co.uk

t 01245 298273

 

 

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