Escalating Ground Rents

The hidden trap of escalating ground rents in new build properties: What every buyer needs to know

When purchasing a new build property, the excitement of owning a brand-new home can sometimes overshadow crucial details in the agreement. One such often-overlooked aspect is the issue of escalating ground rents. As experienced RICS surveyors, we're here to shed light on this potential pitfall and help you make an informed decision.

Understanding escalating ground rents

Escalating ground rents are a clause in some leasehold agreements where the annual ground rent increases significantly over time:

• Typical clause: Ground rent doubles every 10 or 15 years
• Example: A £500 initial ground rent could become £2000 in just 20 years
• Impact: These increases outpace normal property value growth

The deceptive nature of developer incentives

Developers often mask the issue of escalating ground rents with attractive incentives:

1. Paid stamp duty land tax
2. Covered legal expenses
3. Inclusion of furnishings

These short-term benefits can distract buyers from the long-term financial implications of escalating ground rents.

Comparing new builds to older properties

To put this in perspective:

• Many Victorian conversion leasehold properties (over 100 years old) have ground rents of £250-£500 per annum
• These rates remain relatively stable over time

The Legal Landscape: CMA intervention

Fortunately the Competition and Markets Authority (CMA) has recognised the unfairness of these practices:

• Action: Requiring removal of unfair ground rent terms from existing contracts
• Scope: All major housebuilders are under scrutiny
• Future impact: Prohibition of such terms in future leasehold contracts

"These ground rent terms can make it impossible for people to sell or get a mortgage on their homes, meaning they find themselves trapped. This is unacceptable." ~ Andrea Coscelli, CMA Chief Executive

"The Government is pursuing the most significant reforms to leasehold in forty years, including by protecting future homeowners, restricting ground rents in new leases to zero and ending the use of leasehold in new houses altogether." ~ Robert Jenrick, Housing Secretary

Implications for homebuyers:

1. Difficulty in selling properties with escalating ground rents
2. Challenges in securing mortgages
3. Potential for being 'trapped' in a property

Government and regulatory actions:

1. CMA investigation and enforcement
2. Potential court action against non-compliant developers
3. Government reforms to leasehold laws

Advice for prospective buyers:

1. Scrutinise the ground rent clause in any leasehold agreement
2. Don't be swayed by short-term incentives
3. Consider the long-term financial implications
4. Seek professional advice before signing any agreement

The role of surveyors

As experienced surveyors, we can:

1. Review leasehold agreements for unfair terms
2. Provide context on typical ground rent arrangements
3. Offer advice on the potential long-term impact of escalating ground rents
4. Help you make an informed decision about your property purchase

While new build properties can be attractive, it's crucial to look beyond the shiny facade and carefully consider all aspects of the purchase, especially ground rent terms. With the right information and professional guidance, you can avoid the pitfalls of escalating ground rents and make a sound property investment.

Planning to buy a new build property? Don't let escalating ground rents catch you off guard. Contact our expert surveying team today for a comprehensive review of your leasehold agreement and professional advice on your property purchase.