In a case that underscores the perils lurking in the small print of many modern leasehold contracts, one unlucky couple’s flat sale is on the brink of collapse thanks to a single clause. The offending provision? One that allows the ground rent to be recalculated every 25 years based on the property’s market value at the time.
While a £200 per annum ground rent seemed innocuous enough when the flat was purchased, the reality of this ‘cleverly’ worded clause has come home to roost now that it’s time to sell. The couple found a willing buyer and the sale was moving forward – until the buyer’s mortgage lender took a closer look at the lease.
In a shocking eleventh-hour reversal, the bank pulled their agreement in principle, declining to extend a mortgage on the property. The reason? The ground rent clause, which they deemed too high-risk. The decision blindsided the sellers, who had no trouble obtaining their own mortgage when purchasing the flat originally.
Desperate Measures to Save the Sale
Facing the imminent implosion of not only their own sale, but the entire property chain, the beleaguered sellers have spent thousands of pounds in legal fees trying to negotiate a deed of variation with the freeholder. The goal? To amend the ground rent clause to something more palatable to lenders.
But progress has been painfully slow, with the freeholder dragging their feet every step of the way. Meanwhile, the clock is ticking on the sellers’ own onward purchase. With the very real prospect of the whole chain collapsing, they’re caught between the Scylla of a ruinous lease and the Charybdis of losing their next home.
The Leasehold Trap: A Cautionary Tale
This case is far from unique in today’s leasehold landscape. In recent years, ground rents have morphed from token annual sums into aggressively escalating cash cows for freeholders and outside investors, who acquire the lucrative contracts from developers.
Leases on new-build flats and houses frequently contain provisions for ground rents to double every 10-25 years – or in this case, to rise in tandem with the property’s value. Great news for freeholders, who gain an appreciating income stream for nil ongoing outlay. Not so great for leaseholders, who don’t see a penny of that increase in ‘their’ home’s paper worth.
This is an example of the property sector dumping new homeowners into highly complex ground rent terms. The obvious question is: why did the banks not spot these rip-offs when the leases were first sold and tell the housebuilder to rewrite them or they would not lend?
– Sebastian O’Kelly, Leasehold Knowledge Partnership
A Legislative Letdown
Campaigners had high hopes that 2022’s Leasehold Reform (Ground Rent) Act would tackle onerous clauses in existing leases. But while the act outlawed ground rents on new leases, it fell short of capping those historical rent provisions already in place.
The much touted leasehold and commonhold reform bill, which gained Royal Assent in July 2024, delivered another disappointing omission for those agitating for retroactive ground rent controls. The bill contained plenty of positives, but on the specific issue of reining in spiralling ground rents on existing leases, it remained silent.
A Costly Extension to Buy Freedom
For the anonymous couple at the heart of this cautionary tale, a lease extension – rather than a deed of variation – may be their most viable escape route, according to leasehold experts. A statutory lease extension is an entirely new agreement, and under current law cannot contain ground rent provisions.
But such freedom comes at a hefty price. Leaseholders must compensate the freeholder for the extension, as well as foot the bill for the legal work involved in drawing it up. In prime London postcodes, those payouts to the freeholder alone can easily hit six figures.
It’s a painful reality for leaseholders who are ‘paying for the privilege’ of not paying ground rent, on top of the premium they shelled out for their ‘dream home’ in the first place. A home which, as this case illustrates, can quickly morph into a financial quagmire.
The Conveyancing Conundrum
The question many will be asking is: how do such punitive ground rent clauses slip through the due diligence net in the first place? Should the couple’s conveyancing solicitor have raised red flags about the leasehold terms when they originally purchased?
As with many leasehold terms that have soured over time, the ‘toxicity’ of the clause may not have been immediately apparent at the outset. Indeed, the sellers’ original mortgage lender had no qualms about the lease. It’s only in the cold, harsh light of resale that the true implications have crystallised.
That said, conveyancers have a duty to parse every line of a lease and highlight any clauses that could materially affect a buyer’s enjoyment of their property, or its future marketability. A clause that outsources ground rent reviews to the whims of the market merits, at minimum, a prominently worded warning to clients.
A good conveyancing solicitor should point out the potential impact of extra costs such as ground rent increases. Lenders are required to assess onerous lease terms that could affect borrowers’ ability to repay a loan or the future saleability of a property.
– UK Finance
The Perils of ‘Virtual Freeholds’
The case is a stark reminder that a long lease – even one with 90-plus years remaining – is not the ‘virtual freehold’ it’s often marketed as. Leaseholds by definition have property-use restrictions and other obligations baked in, some of which may not become fully apparent until many years post-purchase.
While legislative reforms are chipping away at the most egregious practices, the sad reality is that many existing leaseholders remain caught in the tangled web of complex, one-sided contracts they unwittingly signed up for. And as this cautionary tale illustrates, the fallout can be both financially and emotionally devastating.
As for the fate of the anonymous sellers in this leasehold quagmire, only time will tell if they can untangle the legal Gordian knot their ground rent clause has morphed into before their sale – and sanity – unravels completely. Their story is a sober reminder for all homebuyers to tread carefully in the leasehold labyrinth, where hidden traps abound.
