A guide to ground rent from Innovus

What is Ground Rent? A Guide for Landlords and Leaseholders

14 May 2024 | Written by Innovus

Asset Management

Ground rent is a rental payment made by a leaseholder or tenant to the freeholder who owns the land that the property is built on. It is very common for leasehold properties and mobile home parks, where the homeowner owns the building itself but not the land underneath.

This guide will explain everything you need to know about ground rent – what it is, how it works, the laws regulating it, and how freeholders can effectively collect these payments from their leaseholders.

What is Ground Rent?

Ground rent is a fee paid on a recurring basis (typically annually) by a leaseholder to the freeholder or landowner for the ability to occupy the land that their property is built upon.

The key point is that with a leasehold property, the leaseholder owns the building and structure itself but not the land it stands on. The land is owned by the freeholder who allows occupation by the leaseholder in exchange for the ground rent payment.

This is a very common arrangement for flats and maisonettes, where the leaseholders own their individual units but not the entire building or land. It is also frequently used for mobile home parks, where the homeowners buy the mobile units but rent the plots of land they are stationed on.

In summary, ground rent enables a separation between owning the building and owning the underlying land it occupies.

How is Ground Rent Calculated?

The specific terms of a ground rent – the amount due, frequency of payments, any future increases, and lease duration – are all defined in the leasehold agreement between the freeholder and leaseholder.

Typically, ground rent is a fixed annual payment amount like £100 or £250 per year. However, it can also be calculated as a percentage of the overall property value, like 0.1% of the home’s market price each year.

Many ground rents include provisions for periodic rent reviews, where the amount increases on certain anniversary years – for example doubling every 10 or 25 years. Historically, some ground rents started off at a “peppercorn” or nominal rate before increasing substantially later.

The payment frequency, any increases, and total lease duration are all legally binding terms that the leaseholder agrees to when signing their leasehold agreement.

Who Pays?

Ground rent is solely the obligation of the leaseholder who is occupying the property. It is one of the key responsibilities they take on as part of the leasehold agreement with the freeholder.

Failure to pay the ground rent can allow the freeholder to terminate the lease and ultimately regain possession of the property through the legal process. Missing payments is a breach of contract.

Therefore, it is crucial for leaseholders to keep up with their ground rent payments based on the amounts and schedule defined in their lease. Freeholders also have a vested interest in collecting all rents due from their properties.

Ground Rent Laws and Regulation

There are a number of key laws and regulations around ground rents in England and Wales:

The Leasehold Reform Act 1967 gave leaseholders the right to purchase the freehold of their property, thereby removing any future ground rent obligations.

The Housing and Urban Development Act 1993 specified rules around collecting ground rent, like formally demanding rent before taking legal action and set procedures for forfeiting the lease.

Most recently, the Leasehold Reform (Ground Rent) Act 2022 made major reforms including:

  • Limiting any new ground rents on most residential leases to zero (an effective ban on ground rents going forward)
  • Giving existing leaseholders enhanced rights to extend their lease extension to 990 years at zero ground rent
  • Enabling leaseholders to have historic ground rents deemed as ‘unrecoverable’ and ostensibly eliminate them

For existing leases pre-dating this Act, ground rent remains a legally binding obligation for leaseholders set out in their leasehold agreement.

Redeeming/Purchasing the Ground Rent

Under the previous laws like the 1967 Act, many leaseholders had an option to purchase the ground rent from the freeholder – known as ‘redeeming’ the ground rent and acquiring the freehold.

The price is calculated based on the annual ground rent amount and the outstanding lease term, relative to the overall property value. Shorter leases or higher ground rents make the freehold more valuable.

There is a statutory process under the leasehold laws for serving an ‘Information Notice’ to the freeholder requesting the ground rent redemption cost and terms. Both parties must observe the prescribed rules for quotes, time periods, and assignment.

For many leaseholders, redeeming the ground rent was preferable to extending or continuing to pay it indefinitely. It allowed them full freehold ownership.

Collecting Ground Rent Payments

For freeholders and their managing agents, collecting payments in full and on time is crucial for a few reasons:

  1. Ground rent represents an investment income stream tied to property values
  2. Consistent collection protects the legal rights defined in the leasehold contracts
  3. Allowing arrears could jeopardise the ability to terminate the lease for non-payment

Effective ground rent collection therefore requires maintaining organised recordkeeping systems to track amounts due from each leasehold property. When payments are missed, issuing formal rent demand notices is required before initiating any legal action.

For large property portfolios with many leasehold units, specialist managing agents are often employed to handle rent collection efforts. Companies like Innovus offer ground rent and service charge collection services to take this responsibility off of freeholders.

Innovus offers a comprehensive solution for collecting ground rents from both commercial and residential leaseholders. Our experienced team can:

  • Set up payment portals and online accounts for leaseholders
  • Issue rent demand notices and arrears statements
  • Pursue legal action against non-payers if needed
  • Handle the redemption process for leaseholders

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