Ground rent was originally designed to reflect only the value of the ground that was being let, ignoring any building on it. This term is now frequently used to mean a low or nominal rent, usually one paid under a long lease that was granted in return for a premium. The landlord obtains a capital sum for the lease so there is no reason for the tenant to pay a full market rent for the property as well. Often the ground rent is simply a convenient figure and has little bearing on the value of the land.

Over the last few decades ground rent has been a way for developers to increase the money they can make from a particular development. Ground rents often start at a reasonable amount but then are subject to review. Ground rents generally fall into three categories – fixed rate, increasing in line with RPI inflation, or doubling at specified intervals. It is only ‘doubling’ ground rents which lead to potentially onerous terms because they increase exponentially. Unfair or high ground rents can result in properties taking longer to sell, being more expensive and even being unmortgagable. Examples of these include leases that allow ground rents to double every decade.

Ground rents and their review can be of concern to housing associations who have unwittingly built up ground rent portfolios. Off the shelf and S.106 deals with developers often come with ground rents already stipulated in the leases. Direct development of flats for market sale, and acquisitions from local authorities, other housing associations and private landlords may all have added to ground rent portfolios. However, the ground rent, type of increase and frequency of the review of such ground rent will be different on every deal. Managing these portfolios can take up resources of the housing associations. Also, where the housing association is the head tenant, it will want to pass on the burden of the ground rent to any sub-tenants. This can affect affordability, particularly in the case of shared ownership leases where the leaseholder must also pay the specified rent and service charge.

The Communities Secretary launched a consultation on 15 October 2018 on plans to improve the leasehold sector for home owners with a view to bringing an end to unfair leasing practices particularly in relation to ground rents. Part of the leasehold reform is to assist leaseholders in buying the freehold to make this process faster, fairer and cheaper to reduce the risk of tenants being hit by unfair rental costs. The consultation proposes ground rents for new leases to be capped at just £10.00 per annum or a nominal sum, and with no mechanism for review. Of course, this will only apply to new leases and will not apply retrospectively.

Whilst the negative aspects of ground rent have been aired, it would not be possible to consider these without looking at reasons for the continued use of ground rent. Retirement housing relies heavily on ground rent to enable retirement properties to be sold at lower prices, thus widening the availability of these schemes.  In 2017 McCarthy and Stone made profits of £27 million and nearly 4% of this revenue was by selling residential freeholds to ground rent speculators. This ground rent appraisal is calculated into McCarthy and Stone’s appraisal and impacts on how much they can afford to pay for land. McCarthy and Stone are keen to emphasise that they retain control of the property and deal with the residents directly to ensure stability for the residents of these sites. McCarthy and Stone ground rents are generally fixed with a review every 15 years. This review is calculated in reference either to an increase in the retail price index or an annual 2% increase in the ground rent in the 15 year period. Ground rents, in this situation, do not double and leaseholders retain the right to acquire the freehold.

A recent consultation by The Law Society in 2017 emphasised the importance of removing the most onerous impacts and ensuring transparency in relation to ground rent. This would require acceptable parameters and increase mechanisms and ensuring parties know who is collecting the ground rent.

Having considered the negative and positive aspects of ground rent it is possible to see how it has evolved from a nominal amount into a money making scheme for developers, creating negative publicity along the way. The need for ground rent is not lost, as noted by McCarthy and Stone in enabling companies to reduce the cost of specialist housing.

Housing associations should ensure ground rents are set at less than 0.1% of the property valuation (which is line with the recommendations of most mainstream lenders), and increase at no faster rate than inflation. Ground rents which double every 25 years are likely to be accepted by lenders but a review pattern which is more frequent than this is almost certainly going to prove to be onerous. All housing associations should carry out an investigation of the ground rents they charge and have to pay, and have a clear ground rent policy to manage their portfolios as effectively as possible.