Ground rent problems when selling a flat

When it comes to selling a leasehold flat in the UK, one of the most important – and sometimes misunderstood – aspects is ground rent. Sellers are often surprised at just how significant ground rent can be in determining the marketability and value of their property.

What is Ground Rent?

Ground rent is the rent you pay to your freeholder (or landlord) for the land on which your flat sits. It is a fixed payment set out in the terms of your lease, and in many older leases it was historically nominal (often just a few pounds a year). In more recent decades, however, developers and freeholders have inserted higher and escalating ground rent provisions, which has turned what was once a token amount into a material financial burden.

Ground rent should not be confused with service charges. Service charges are contributions towards the running costs of the building – things like cleaning communal areas, maintaining lifts, paying for insurance, or carrying out major works. These charges can vary year by year depending on what expenditure is needed. By contrast, ground rent is essentially a contractual obligation in your lease: it does not relate to services received, it is simply rent for the use of the land itself, and the obligation to pay it is absolute unless the lease is varied or extended.

For buyers and sellers, distinguishing between the two is critical. A high or escalating service charge may be viewed as a budgeting issue, but a high or escalating ground rent can affect the legal status of the lease and its mortgageability.

Why Ground Rent Matters

Ground rent has become a contentious issue in recent years because of how it impacts both property value and mortgageability. Certain ground rent terms are viewed as onerous, and can restrict the pool of buyers or force a seller into accepting a reduced price. Buyers’ solicitors, surveyors and mortgage lenders are trained to identify these provisions and will almost always raise them during conveyancing, which means any issues tend to surface quickly once a flat is put on the market.

Common Ground Rent Issues

1. High Ground Rent

   • The problem: If ground rent is above £250 per year outside London, or £1,000 per year in London, the lease may technically fall into the category of an assured tenancy under the Housing Act 1988. This means the leaseholder could, in theory, face possession proceedings for non-payment of ground rent. Mortgage lenders are wary of this, and many will refuse to lend on such leases. In addition, even ground rents just below these thresholds are increasingly treated with suspicion by cautious lenders.

   • Impact on sale: Significantly reduces the buyer pool, often leaving only cash buyers. This depresses the achievable sale price, and may prolong the selling process.

   • Possible solutions: A deed of variation to reduce or cap ground rent; legal costs vary but often range from £1,000–£3,000, and freeholders may seek a premium. Alternatively, selling with an indemnity insurance policy may help in limited cases, though not all lenders accept this and such policies may not cover future escalations.

2. Doubling Ground Rent Clauses

   • The problem: Some leases contain clauses where the ground rent doubles every 10 or 20 years. While the rent may start low, over time it escalates to levels that become unmanageable and unacceptable to lenders. A ground rent of £250 today could become thousands of pounds per year within a few decades.

   • Impact on sale: Creates future affordability and resale problems, making the flat less attractive. Buyers and lenders see these clauses as ‘toxic’, often resulting in lower valuations or outright mortgage refusals.

   • Possible solutions: Serving a Section 42 Notice to extend the lease usually results in the ground rent being reduced to a ‘peppercorn’ (effectively nil). This, however, comes with valuation costs and a premium to the freeholder – often several thousand pounds and a timeframe of 6–12 months. Alternatively, some freeholders may agree to a deed of variation to substitute an RPI-linked rent instead of doubling, but this can still cause issues.

3. Unpaid Ground Rent

   • The problem: Arrears of ground rent can result in enforcement action by the freeholder, including the theoretical risk of forfeiture. Even small arrears can cause issues with lenders during the conveyancing process, because most lenders require clear evidence that there are no outstanding sums due under the lease.

   • Impact on sale: Can delay or derail a sale if not resolved early. Buyers’ solicitors will insist arrears are cleared, which can frustrate chains if there is a dispute about the amount owed.

   • Possible solutions: Settling arrears in full is usually necessary. In some cases, a dispute may need to be resolved through the First-tier Tribunal (Property Chamber), which adds cost and delay. It is advisable to obtain a receipt or confirmation of account from the freeholder or managing agent to satisfy a purchaser’s solicitor.

4. RPI or Index-linked Ground Rent

   • The problem: Ground rents linked to inflation (RPI) may seem less severe than doubling clauses, but over time they can still become onerous and unpredictable. A period of high inflation can cause sudden jumps, creating affordability concerns.

   • Impact on sale: Increasingly, lenders scrutinise these terms, which can again reduce mortgage availability. While less toxic than doubling, RPI-linked rents are not always lender-friendly, particularly where reviews are frequent.

   • Possible solutions: Similar to doubling clauses – often resolved through lease extension under Section 42, which reduces ground rent to a peppercorn. Alternatively, negotiating a deed of variation with the freeholder may stabilise the rent on more acceptable terms.

Current and Future Legislation

• Leasehold Reform (Ground Rent) Act 2022: This bans ground rent on new long residential leases (post-June 2022). However, it does not help existing leaseholders, who remain subject to the rent terms set out in their original leases. The Act was designed to put a stop to the practice of charging escalating ground rents on new builds, but it offers no retrospective relief.

• Leasehold and Freehold Reform Act 2024 (LAFRA): Expected to make lease extensions cheaper and easier by reforming the calculation of premiums and potentially abolishing marriage value. It also includes proposals to increase the standard lease extension term to 990 years and reduce ground rents to a peppercorn, which would normalise many problematic leases. Sellers should watch closely, as these reforms could significantly reduce the cost-benefit analysis of lease extensions and improve marketability.

• Housing Act 1988: Creates the ‘AST trap’ where high ground rents can cause long leases to be treated as assured tenancies, with all the associated risks, including the possibility of possession proceedings for arrears. Although case law is limited, conveyancers and lenders treat this as a genuine risk and it continues to be a major red flag during sales.

Timescales and Costs for Addressing Ground Rent Issues

• Deed of Variation: Usually takes 1–3 months, with legal costs of £1,000–£3,000 plus whatever premium the freeholder demands for agreeing to the change. This route works well if the ground rent terms are the only issue, but freeholders can be reluctant to agree or may request a substantial premium.

• Lease Extension (Section 42): A statutory process that generally takes 6–12 months. Costs vary widely depending on lease length, property value and ground rent level, but premiums of £10,000–£30,000+ are common. Professional fees for valuers and solicitors also need to be factored in. The main advantage is that it reduces ground rent to a peppercorn and adds 90 years to the lease, solving both the rent problem and lease length concerns in one go.

• Indemnity Insurance: Quick to arrange and relatively cheap (usually a few hundred pounds). It can provide comfort to buyers where historic arrears or technical breaches exist. However, it is not always accepted by mortgage lenders, and it does not fix the underlying lease terms, so future issues may still arise.

• Settling Arrears: Straightforward if arrears are modest – payment clears the issue immediately. Where arrears are disputed, the process can take longer and sometimes requires application to the First-tier Tribunal. Costs depend on the arrears themselves and the freeholder’s legal and administration fees, which they are usually entitled to recover under the lease.

Selling ‘As Is’ vs Fixing the Issues

• Fixing the Issues: Leads to a higher sale price and a much wider buyer pool (including those needing mortgages). Buyers and their lenders take confidence from a lease that has been regularised, which usually results in stronger offers and smoother transactions. The downside is that the process can be both costly and time‑consuming: instructing surveyors, negotiating with freeholders, paying premiums and legal fees, and waiting months for completion of lease extensions or deeds of variation. Sellers must weigh whether the potential uplift in sale price justifies the upfront outlay and delay.

• Selling As Is: Offers speed and simplicity, avoiding the legal wrangling and expense of lease variations or extensions. It can be attractive for sellers who need to move quickly, release equity, or who do not have the funds to resolve the ground rent issues themselves. However, this route almost always means accepting a reduced sale price, because the property will appeal mainly to cash buyers, professional investors, or specialist companies who factor the cost and risk of fixing the lease into their offers. Sellers should expect fewer enquiries, longer negotiations, and a narrower market when pursuing this option.

Final Thoughts

Ground rent issues are complex, technical, and increasingly scrutinised by both buyers and lenders. Sellers should not underestimate the impact these can have on the sale of their flat, as they influence not only price but also how easily a transaction can be financed. The right course of action depends on timescales, financial position, and appetite for negotiation with the freeholder, as well as the seller’s long‑term goals. For those seeking to maximise value, fixing the problem is often the best strategic solution, though it requires investment of both money and time. For others who prioritise speed, certainty, or lack the resources to pursue variations or lease extensions, selling to a cash buyer willing to take on the risk may be the more pragmatic and realistic option. In practice, sellers should weigh up these factors carefully, perhaps with professional valuation advice, to decide which route delivers the best outcome for their circumstances.

Tip for sellers: Obtain a copy of your lease early in the sales process and seek professional advice. Understanding the precise ground rent terms is essential, as even small details can make a difference to a buyer’s lender. Identifying and addressing ground rent problems upfront will prevent last-minute surprises and give you a clearer view of your selling options. It is also sensible to gather supporting documents, such as receipts for payments, service charge accounts, and any correspondence with the freeholder, so that a buyer’s solicitor can quickly verify compliance. By preparing in advance, you strengthen your negotiating position and can make informed decisions about whether to fix issues or sell as is.

Frequently Asked Questions on Ground Rent Issues When Selling a Flat

1. What exactly is ground rent, and how is it different from service charge?
   Ground rent is a fixed payment you owe to the freeholder for the land your flat sits on. Service charge is separate and pays for maintenance and running costs of the building.

2. Why does ground rent affect the sale of my flat?
   Lenders often refuse mortgages on leases with high or escalating ground rents, which narrows your buyer pool and usually reduces your sale price.

3. What counts as “high” ground rent?
   If your ground rent is over £250 per year outside London or £1,000 per year in London, your lease could technically be treated as an assured tenancy under the Housing Act 1988, which most lenders will not accept.

4. What’s the problem with doubling ground rent clauses?
   They can make ground rent rise to thousands of pounds a year within a few decades. Lenders treat these leases as “toxic,” and many won’t lend on them.

5. Is RPI-linked ground rent better than doubling ground rent?
   It’s often seen as less severe, but because it tracks inflation it can still rise unpredictably. Some lenders are cautious even with RPI-linked terms.

6. What if I have unpaid ground rent?
   You will usually need to clear arrears before you can sell. Even small arrears can block a sale, because buyers’ solicitors will insist the account is up to date.

7. Can I fix ground rent problems before I sell?
   Yes. Options include a deed of variation (to change the rent terms) or a lease extension under Section 42 (which reduces rent to a peppercorn). Both take time and money but can make your flat more attractive to buyers.

8. How much does it cost to fix ground rent issues?

   • Deed of variation: £1,000–£3,000 plus freeholder’s premium.

   • Lease extension: £10,000–£30,000+ depending on lease length and value.

   • Indemnity insurance: a few hundred pounds, though not always accepted.

9. What if I don’t want to spend money fixing it?
   You can sell “as is,” but you’ll usually need to accept a lower price. Most buyers in this situation are cash investors or specialist companies.

10. Is the law changing to help with ground rent?
    Yes. The Leasehold Reform (Ground Rent) Act 2022 banned ground rent on new leases. The Leasehold and Freehold Reform Act 2024 is expected to make lease extensions cheaper and easier, potentially normalising ground rents to a peppercorn on existing leases.