Modern Ground Rent: Buyers Beware

Professional negligence solicitor, Lee Dawkins, looks at the problems caused by Modern Ground Rent provisions under the Leasehold Reform Act 1967.

We have recently been instructed to deal with a number of professional negligence claims involving long leases of National Trust properties which have been extended under the Leasehold Reform Act 1967.

Purchasers of these leases have been caught out by a provision which allows landlords (such as the National Trust) to charge a significantly enhanced ground rent, known as a modern ground rent.  Rents can rise from just £10 or £50 per year to more than £5,000 per year.  The effects of this can be devastating for the un-witting purchaser where they have paid an open market value for the property and have not budgeted for this rise.

Conveyancing solicitors, surveyors and valuers who are experienced in dealing with leases and the provisions of the 1967 Leasehold Reform Act will be alert to this problem and will advise their clients of its likely impact on them.  However, not all conveyancers, surveyors and valuers have the necessary expertise to identify this issue and some transactions proceed without the purchasers realising they are liable in this way. Those who lose out as a result are seeking compensation for their losses by making professional negligence claims.

A liability for modern ground rent can arise wherever a tenant has exercised their statutory right to extend a lease under the 1967 Act by a period of 50 years.  The Act has proved very popular with tenants over the years, but while it benefits the tenant in the short-term it stores up problems for the future with the impact often hitting unsuspecting purchasers.

If a tenant chooses to extend their lease under the Leasehold Reform Act then the landlord is entitled to charge the modern ground rent at the start of the 50 year extension.
The National Trust has defended its position to charge the modern ground rent where it applies on the basis that the Act included the provision in order to strike a balance between the competing interests of tenants and landlords. The National Trust acknowledges that some of their tenants might be unaware that they have this liability and may be taken by surprise.

Calculating the modern ground rent is complex and is a task generally undertaken by a professional valuer or surveyor.  In simple terms the modern ground rent is a proportion of the full rental value of the property.  This is often referred to as the "site value" and is effectively the value of the site on which the property sits.  For example, a property that has an open market value of £300,000 could be deemed to have a site value of £105,000, representing 35% of the total value.  The annual modern ground rent is then calculated on a de-capitalised basis, which in this example would be £5,250 per year.  So, on the date upon which the lease extension starts the property owner could find themselves facing a demand from their landlord for an annual rent of £5,250 rather than just £50 or so previously charged.

The liability to pay such a massively increased ground rent will inevitably reduce the value of the property.  However, sellers and estate agents frequently fail to factor in the liability for an increased rent, leaving purchasers with a bill for rent they cannot afford and a significantly diminished asset.

The National Trust has offered some of its tenants the option of paying a lump sum to ‘buy out’ their future obligation to pay the modern ground rent. The lump sum payment is calculated on a case by case basis and will depend on the rental value of the property and the future date on which the liability to pay the increased rent arises.

In these circumstances the purchaser’s only recourse is to examine the quality of the professional advice given to them by their solicitor, surveyor or valuer at the time they acquired the lease.  If the professional should have known about the potential for such a significant increase in the ground rent, then failure to draw this to their client’s attention may leave them open to a professional negligence claim for compensation.

If you have received a demand for modern ground rent, or have purchased a lease extended under the Leasehold Reform Act which may give rise to a future liability for modern ground rent, then call professional negligence solicitor, Lee Dawkins, on 0808 139 1595, or e-mail him direct at [email protected]

We offer a free legal helpline and are able to deal with many professional negligence claims on a no-win no fee basis.

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