Ground Rent Escalation Clauses
Ground Rent escalation clauses in residential Leases-was my solicitor negligent?
There has been recent publicity about Ground Rent escalation clauses in residential Leases and the shocking impact they can have if the escalation is too rapid. Some home owners have found that their otherwise standard Leasehold property has a hidden time bomb in a ground rent review clause, which often doubles the rent after a specific period or at set periods throughout the term of the Lease.
Although these clauses will often appear quite innocent and may be included in standard Leases produced by reputable property developers, they can on close examination be seen to be more sinister and can cause all kinds of problems, particularly later during the rest of the term of the Lease.
Ground Rent Doubling Every 10 – 25 Years?
It is known that many properties have been sold on a leasehold basis with automatic doubling of ground rent at intervals of 25 years and even every 10 years. A ground rent of £250 per annum, which doubles every 10 years, would be £64,000 per annum after 80 years. The rate of increase even over the first 30 years is 800% and would clearly far outstrip any inflationary increase which these clauses purport to cover. The freehold reversion may be sold on by your reputable property developer to an investor who is only interested in the maximum return on his investment.
Should I have been advised against the increase clause?
In the first place any increase in rent in a Lease has to be looked at carefully. Rent review clauses are not uncommon but automatic stepped rent increases have to be checked carefully, in case the stepped increases are unfair or unreasonable throughout the term of the Lease. A Clause which automatically doubles the rent or ground rent is capable of operating unfairly and so is one of those clauses which your Solicitor ought to be checking for you and bringing anything unusual or onerous to your attention. If the rate of increase is high or the dates of the stepped increases are too short these should be brought to your attention. A doubling of ground rent several times during the course of a Lease is clearly something that a Solicitor ought to bring to your attention and if this is unusual or onerous in the context of your Lease this should also be pointed out.
One of the problems that Leaseholders have been facing is in respect of the current and future marketability and value of their Leasehold interest. If a clause in your Lease is onerous it could impact upon your ability to sell your property or recover the correct price as a discount may be sought by your Buyer. Further down the line a higher ground rent can impact upon the relative valuations of the leasehold and freehold interests in the property. The higher ground rent increases the value of the freehold reversion as an investment. The higher the freehold reversion is valued as a proportion of the overall property value, the lower the leasehold value may be.
In a residential lease of say 99 years, as the term runs through, the value of the leasehold interest generally reduces and most residential leases of 60 years or less are not considered good marketable title, without exercising any right to extend the Lease. ( some Mortgage Companies require even a longer term remaining and Leases of between 60-70 years remaining require particular care).When a Lease extension application proceeds the premium payable to the Landlord for the extended Lease might increase as the length of the remaining term decreases. The amount payable to the Landlord for the extended Lease may also be affected by the ground rent review provisions in the Lease( if the ground rent is capitalised as part of the valuation exercise), potentially leaving the Leaseholder, with a ground rent escalation clause, with a substantial loss. We are Solicitors and are not qualified to give valuation opinion. These comments are just general indications of some of the risks relating to short residential leases. We always advise Clients to obtain professional valuation opinion on these matters.
The amount of the ground rent at any given time can also be relevant to the statutory provisions affecting the Lease. There are provisions (for example, relating to Assured Tenancies under the Housing Act 1988), which apply to residential tenancies where long leases at a low rent are excluded. If the automatic doubling of rent over the term of the Lease brings the ground rent above any particular threshold set by the legislation then the statutory provisions can have a different impact on the Lease and potentially cause the Leaseholder a loss. The exact impact would depend upon the individual Lease and the circumstances of the property, the specific legislation concerned and whether the low rent provision was subject to periodic increase by statutory instrument. In these cases, once the potential legal implications can be established, it would be necessary to obtain expert valuation evidence to determine any adverse impact upon the value of your Lease.
Take action now – we are specialists in this area.
If you believe that you have suffered a significant loss or damage at the hands of your solicitor as a result of buying a leasehold property with a ground rent escalation clause then it is best to seek advice as you may wish to sue your solicitor for negligence, but may also be fearful of going up against a legal practitioner. For example, their insurance will often allow for an expensive legal team to assist them as a defendant. Such legal assistance will also be well-versed in the defences used when a solicitor is sued for negligence.
At Matthew Wilkinson Solicitors, we have a wealth of experience to draw from that will help conciliate this possible advantage. Matthew Wilkinson himself has nearly 30 years’ experience with handling solicitor’s negligence claims and Matthew Wilkinson Solicitors deal with cases of this specialism on a daily basis.
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