Ground Rent Defined: How It Works and Who Has to Pay It
April 26, 2022
If you’re looking to buy a home, you’ve probably come across the term ground rent and wondered what it means. This article will go into detail as to what ground rent is, how much it amounts to, who is responsible for paying it, and what might happen if you don’t pay it. Keep reading to find out!
What Is Ground Rent?
Ground rent is the amount of money paid as rent for the land a home is built on. If a home is built on a long lease property, then the property owner has to pay rent to the landlord, also known as a freeholder.
The lease stipulates the amount that needs to be paid and when it needs to be paid – the contractual rental payment can be charged either as a quarterly or an annual instalment. Ground rent can be either fixed or escalating. If it’s fixed, the amount will remain the same throughout the whole term of the lease. If it’s escalating, on the other hand, rent payments will increase during the term of the lease.
However, ground rent can have another meaning, known as peppercorn rent. This is a merely symbolic, nominal rent, where “peppercorn” refers to a token of no monetary value. This type of ground rent will actually never be collected.
The Leasehold Reform Bill
The Leasehold Reform Bill, or the Ground Rent Bill, was introduced in 2021 and it proposes that ground rent is restricted to one peppercorn for all new long leases. The aim of the bill is to make leasehold ownership easier and fairer, as well as more affordable for the leaseholder. This bill applies only to England and Wales, and it should start being implemented in 2023.
What Is Ground Rent and Service Charge?
The term ‘service charge’ is often mentioned alongside ground rent; a service charge or estate rent charge is a sum that needs to be paid by each household that pays ground rent for the upkeep of the surrounding area. All households are required to pay it because the money goes towards building insurance, maintenance, repairs, running costs, and staff salary. The service charge is paid in instalments – either monthly or biannually.
|DID YOU KNOW? The leasehold system in England and Wales can be traced back to William the Conqueror; this ruler claimed that he owned all the land in the country and distributed it among wealthy lords who had the right to charge ground rent to anyone living on their piece of land.|
How Much Is Ground Rent?
The amount of ground rent varies – it can be anything from £10 to £500 per year, depending on the terms of the lease. In general, ground rent is affordable; the average leaseholder pays £50 a year for the property in their possession. However, if the lease gives the landlord the right to an escalating ground rent, they can significantly increase the payments – so you need to be extremely careful when signing your lease. Luckily, leaseholders that have owned the property for more than two years, can receive a lease extension of up to 90 years and become entitled to peppercorn rent, i.e. they won’t be obliged to pay any monetary rent to their freeholder.
How Is Ground Rent Calculated in the UK?
In the UK, there is no system in place for calculating ground rent; the amount the leaseholder needs to pay depends on the lease, the freeholder, and the type of property. The numbers show that the average ground rent for ex-local authority flats is £10 a year, while the ground rent for modern flats is in the range of £200 to £500 a year.
Although freeholders are free to charge as much as they please, they usually charge 0.1% of the property value in ground rent; for example, if the property is valued at £200,000, the ground rent will amount to £200 per year.
Now that you know how is ground rent calculated, you also need to know that the lower the ground rent, the better. If you’re applying for a mortgage, keep in mind that mortgage lenders will be hesitant to grant approval if the ground rent exceeds £250 per year.
|DID YOU KNOW? An apartment can’t be sold with an absolute freehold title because it is built on top of other apartments, thus occupying the same area of land. Freeholders attach a small area of land to each apartment and charge either peppercorn rent or a very small amount of money.|
|Ground rent is money paid to a freeholder for the use of the land a property is located on.|
|Paid in quarterly or annual instalments, ground rent can be either fixed or escalating.|
|The amount of ground rent is determined by the terms of the lease, ranging from £10 to £500 per year.|
|Leaseholders that receive formal, written requests by their landlord are obliged to pay ground rent.|
|When ground rent is not collected, freeholders can take legal action or start a forfeiture action to reclaim the property.|
Who Pays Ground Rent?
Anyone that owns a leasehold property is under the obligation to pay rent to the freeholder, i.e. to the landlord that owns the land the property is built on. Leaseholders have to pay ground rent for as long as their lease is valid – leases can be valid from 99 to 999 years.
Whenever you set out to buy a property, check how many years are left until the expiration of the lease because the landlord can increase the rent after the expiration date, and extending the lease can cost you money.
Now that you’re clear on what is ground rent in the UK and who is responsible for paying it, you may find it interesting that in most cases, owners of flats and maisonettes pay ground rent, but some houses are sold as part of the leasehold system as well.
However, a leaseholder is only obliged to pay ground rent if the freeholder asks them in writing. The freeholder’s request needs to contain the following:
- The leaseholder’s name
- The period of time the demand covers
- The amount that has to be paid
- The freeholder’s name and address
- The name and address of the managing agent (if necessary)
- The due date
If you receive a request containing the information listed above, you are legally obliged to pay ground rent.
How Much Does It Cost to Buy Out Ground Rent?
Leaseholders have the possibility to buy out their ground rent or acquire a portion of the freehold. Flat and apartment owners cannot buy out ground rent, but they can acquire a portion of the freehold if a sufficient number of residents agree to buy out, too. House owners, on the other hand, can buy out ground rent.
The total cost of buying out the ground rent depends solely on the annual ground rent of the property.
How Does the Process Work?
The process is as follows:
- Apply to the Land Registry
- Get a certificate signed by a solicitor
- Notify the freeholder
- Provide two copies of the lease
Once you’ve gone through the steps, you need to learn what is ground rent for your property on an annual level and proceed with the payments.
You’ll need to:
- Provide a receipt for the most recent ground rent payment
- Pay the £50 Land Registry fee
- Pay nine times the annual ground rent (e.g. £100 x 9 = £900)
- Pay the solicitor’s fee
After making all the payments, you can calculate the exact amount it will cost you to buy out the ground rent – the nine annual ground rent payments, plus the £50 fee and the solicitor’s fees, which can vary.
|DID YOU KNOW? In the UK, 57% of leaseholders were unaware of what being a leaseholder entails until after they signed the lease, while 62% of them felt like they were mis-sold on the property.|
What Happens If Ground Rent Is Not Collected?
When the leaseholder fails to make the ground rent payments, the freeholder can decide to take legal action and have a court order issued that will allow them to recover the money owed, or they can proceed with a forfeiture action, which will allow them to reclaim the property. However, forfeiture action is only a possibility if you owe three years’ worth of ground rent, which amounts to at least £350.
How Does Forfeiture Action Work?
When the landlord files for forfeiture action against you, they need to define the ground rent that is delinquent and only then proceed with the legalities. You can avoid a court hearing if you manage to pay the debt before the scheduled date; if you don’t pay the amount before the hearing, the court will grant you a four-week period to repay the full amount. If you manage to do so, you will receive a ‘relief from forfeiture’ and all legal action against you will cease.
However, try to avoid court action against you by paying your ground rent on time; you should take ground rent seriously, meaning that you avoid delinquent payments. They can affect your credit score and make it difficult to be approved for a mortgage or rent a property – landlords will most certainly ask you for a rent guarantor.
|DID YOU KNOW? Buying a leasehold property is more complicated compared to other property types; the shorter the lease, the more hesitant mortgage lenders become and your chances of being approved even for an average mortgage in the UK are very slim.|
Defining ground rent, outlining who is responsible for paying it, and learning what does ground rent cover are essential for any current or future leaseholder in the UK.
Hopefully, our article has helped you get a better grasp of the topic and you can venture into new endeavours equipped with the necessary knowledge.
Ground rent is paid as compensation for using the land on which your property is built. The ground rent payments don’t cover any other services; tenants need to pay the service charge for property upkeep.
Ground rent varies significantly depending on the type of property and its location. It can range from £10 to £500 per year, but the typical leaseholder pays £50 per year in ground rent.
Once you understand what is ground rent, you can see that it doesn’t pay for the same thing as regular rent. If you’re paying ground rent, you’re the property owner, while if you’re paying regular rent, you’re just a tenant and don’t own the property.
Only leaseholders that have received formal, written requests from the freeholders are obliged to pay ground rent. Those who don’t receive a formal request don’t have a legal obligation to pay anything.