Buying a leasehold property means that there will be ground rent conditions as part of the lease. Issues surrounding ground rent and getting a mortgage come into play when the lease features onerous levels of ground rent that already exceed £250 per year (outside of London) or the annual ground rent payments could increase by hundreds over pounds annually over the years because of the ground rent doubling clauses in the lease.
A clause relating to ground rent is generally deemed important if ground rent doubles every 10 years, and indeed in recent years if it increases with the rate of RPI. These clauses are more common in leases around 2006 onwards. Many major developers, including Taylor Wimpey, used them to increase profits without compromising leaseholders.
The same thing happened to the buyer of my leasehold flat, so I know how you can get around this issue. If you’re currently in the process of buying a leasehold property and your mortgage is rejected due to ground rent, in this article we look further into why it might have been rejected due to ground rent and how this issue can be resolved.
Why Has My Mortgage Been Rejected Due To Ground Rent?
The reason a mortgage is rejected on the basis of ground rent will be because the levels of ground rent are onerous, or will be onerous in the near future due to doubling ground rent clauses in the lease.
Mortgage rejections are happening more and more frequently surrounding ground rent. The main issue is when the ground rent already exceeds £250 outside of London, this is because it becomes an assured tenancy agreement. If ground rent levels fall within certain levels prescribed by the Housing Act 1987 (‘the 1987 Act’) could mean that a long lease is deemed to become an assured shorthold tenancy (‘AST’), this figure is currently £250 and £1,000 if inside London.
Why does an AST affect whether a lender will, well lend? Once an AST kicks in, if the leasehold owner was to default on their ground rent payments after the demand dates passed then it becomes easier for the landlord to take possession of the property, leaving the mortgage lender with nothing. An AST opens up a huge risk for lenders, as how do they know that the new owner will indeed pay their ground rent on time and not fall into arrears?
This may also become an issue if the leasehold you are purchasing or selling is currently less than £250 ground rent per yer, but there are doubling ground rent terms in the lease in the not so distant future.
From my own experience, my flat was at £250 ground rent and was going to raise at the rate of RPI in 4 years time. Whilst arguably it didn’t already exceed this £250 mark, it was already being classed as an AST and was considered an onerous ground rent level. I have also seen similar people in this position when the ground rent is far lower, but the doubling ground rent clause is causing a huge issue with mortgage lenders.
Whilst the above is the common issue with a mortgage being declined due to ground rent and will usually come into play first, once the ground rent goes above 0.1% of the value of the property, some lenders start refusing according to the latest financial lenders handbook.
Now, we know why a mortgage is rejected due to ground rent, how do we get around this? And should we?
What Happens If My Mortgage Is Rejected Due To Ground Rent?
Many sellers are only discovering this is an issue when they come to selling which is why ground rent issues have been rearing their ugly head. As we continue to wait for an update on the leasehold reform, existing leases are still governed by onerous ground rent charges so unfortunately it is something we are going to see more of.
When your mortgage is rejected due to ground rent this does not mean game over. There are a few different options;
Indemnity Policy
An indemnity policy is likely to be the first port of call from the sellers side to see whether your mortgage lender will accept it. If this works it is the quickest solution to the problem as it satisfies the mortgage lender, and minimal legal work is involved.
However, this does NOT protect you as the prospective owner. You will also encounter this issue when it comes to selling in the future (unless the lease reform changes things) and you will be subject to rising levels of ground rent. This is not an ideal outcome, apart for for the seller. Also, less and less mortgage lenders are accepting indemnity policies now. Although, not impossible. When I sold my flat, the mortgage lender of the purchase was very satisfied with this solution.
Letter From The Freeholder
I heard this solution mentioned by Matt Lewis, solicitor from Commonhold and Leasehold Experts Limited, he said that a freeholder can write a letter stating that they would not enforce an AST if ground rent fell into arrears.
Of course, you would have to pay for this enquiry to be done through the freeholder. This is the first time I have heard of this solution, but it’s something worth exploring if an indemnity policy doesn’t do the trick.
Deed of Variation
Solicitors are not the best versed on issues surrounding ground rent on leasehold properties (in my experience), and what’s in the best interests of the seller and buyer. A deed of variation seems to be the impulsive thing that is requested from the seller. A deed of variation means making an amendment to the lease that stops the ground rent from increasing, for the rest of the lease term. The seller will need to approach their landlord/freeholder to enquire and start the proceedings for this.
A deed of variation can cost thousands of pounds, and take weeks or months to complete. The outcome is not as enviable as a lease extension as with a deed of variation you still continue to pay ground rent over the years.
Lease Extension
From my extensive research and experience, a lease extension is the BEST option for both seller, and especially the buyer. A formal lease extension can only be started if the owner has owned the property for a minimum of 2 years. It involves adding an extra 90 years to the lease, as well as reducing the ground rent to a peppercorn, or £0.
This makes the property highly saleable and attractive, but it is not cheap. This route is also likely to be in the region of thousands of pounds for the seller and can take between weeks and months to be completed as there is legal work involved between a number of different parties which can slow the process down.
A lease extension can also be started by the seller, and completed by the purchaser if you want to incur those costs. Both a deed of variation and lease extension will allow your mortgage lender to release the funds.
In Summary
If your mortgage is rejected due to ground rent the good news is that there are ways around this. It can be an anxiety inducing time, but the ball really is in the court of the seller and whether they want to incur the costs of a deed of variation or lease extension. However, if they want to sell the leasehold property, it’s going to be an issue they keep encountering.
If you are in this process now, use your solicitor for guidance and step away if the seller is not willing to meet on any of the above. Whilst an indemnity policy could help to release those mortgage funds and get you your dream property, think about the future saleability and an expensive problem that you would knowingly inherit.
If you have any questions or are looking for advice surround leasehold please do leave a comment below or drop an email and I’ll get back to you.
Before You Go…
If you’re in the process of purchasing a leasehold property and have come stuck with the issue, I’d highly recommend jumping over to read the following post about whether to buy a flat with ground rent over £250 and what other issues you should consider before committing…
Hello, thank you for your help in advance. My mortgage is rejected due to a ground rent dubbing every 20 years, now £450pa in 2027 should be £900 etc. Heathrow Area. TW14. My loan is for 30 years, over £200k deposit 30%. I received mortgage offer end of August but this issue has been reported mid October and the bank might refused it due to my very low rates offered in June. Now I have 8 weeks to sort this out or start from the beginning with double interests rates so can’t afford. Possible deed of variation but should I go ahead with indemnity police but lender can still reject it? Kind regards, Pawel.
Hi Paweł, sorry to hear you’re going through this now. A deed of variation can take some months to complete which could occur after your mortgage offer runs out. Indemnity insurance will be the quickest fix (if bank accepts) but you will inherit this ground rent problem. If you envisage living in the flat for a number of years you might be okay, as ground rent may be eradicated by then (currently going through parliament but has been shelved), but if it’s only for a year or two I would go down the DOV or lease extension route with the seller as you will inherit an unsellable flat and £1000s worth of costs. I’d probably be inclined to request indemnity, as well as inquiring about a DOV so you don’t lose time. Hope that helps somewhat, good luck. Best wishes,Nicole.
Hello,
This article has been very helpful. I am currently going through this as we have stumbled across undesirable wording on the lease of the property we are trying to buy with regards to the ground rent. The ground rent provision is not adequate as it cannot be readily established given that it is based on the percentage of the value of the block and whilst there is a cap, this is only in respect of the premium on the resale and not on the ground rent chargeable. We are therefore waiting to hear back from the lender as to whether they will be willing to lend or not. My worry is, if they agree to lend we are likely to face problems in the future when we come to re-sell. If we go down the Deed of Variation route as our solicitor is suggesting it is going to take time. We are currently in private rented accommodation and only have 2 1/2 months until our lease runs out. This is a very stressful time and we are worried it is going to take too long to resolve and we will effectively find ourselves homeless if we don’t soon. Is there anything we can do to speed things up?
Hi Nickie, sorry to hear you’re going through this stressful situation right now and I totally appreciate the timescale. Are you able to gain direct contact with the seller? I found this the only way to speed up contact, although it can be frowned on by solicitors. A deed of variation can take some weeks to arrange with the leaseholder though. Wait to see if the lender accepts, if they do, you may want to take the risk of just proceeding given your circumstances. The leasehold reform will be looking to eradicate high ground rents in the future like they have with new leases so there is hope that in a few years time something like this will come into play. Good luck and hope this helps, thanks, Nicole.
Thanks for this article Nicole, it’s been really helpful in explaining a complex subject. We are in the process of selling our flat and the purchaser has had 2 mortgage offers rejected at the 11th hour due to this issue. The leaseholder has historically proved inflexible so I think the indemnity policy option may be the best route for me but how can I, as a seller, know which lenders may be happy with this option or indeed which providers could provide a policy ?
I Imagine sorting out historical lease issues will be low down the government priority list.
Hi Sue, so glad it’s been helpful and sorry to hear you’re going through this now too. Yes – the government still haven’t looked at resolving this issue in parliament unfortunately. It’s really difficult as the seller to know what banks will accept an indemnity, all I can suggest is looking up the individual banks on Google and their lending terms and look for the clauses on indemnity policies, they usually callout forfeiture of lease. Secondly, I’d ask the question in the national leasehold Facebook group as there are lots of people in there that have also sold with an indemnity so they may be able to tell you the banks, I wasn’t privy to the info on who my purchaser was using unfortunately. I hope this helps and good luck, Nicole. This iS the group: https://www.facebook.com/groups/786983251448976
Thanks Nicole for this very helpful advice. So glad I found your page.
Hi I am purchasing a freehold property that has a ground rent charge, we got a deed of variation but the mortgage lender is still not accepting it, what are the next steps? They want removal of the law of property act 1925, I can’t see the management company removing this?
Hi Amy, so sorry to hear this. I’ve not personally come across this before – I’d recommend putting this message into the leasehold Facebook group as there will be someone who knows what to suggest/has experienced this before; https://www.facebook.com/groups/786983251448976
Hi Nicole
I have a Flat with a £250 ground rent increasing by £100 every 10 years
I’m considering selling up, will I have issues or is it only with RPI and doubling ground rents?
Thank you for bringing this subject to light
God bless you
Hi Jason, thanks for your message. It does tend to be that any ground rent £250 and over is an issue now if you are outside of London, the rest of the terms in relation to the ground rent don’t help but the £250 ground rent is the biggest issue currently so it’s likely you will have issues with a buyer who requires a mortgage. Sorry to let you know this, but it’s definitely best to be aware of it before getting into the selling process. All the best, Nicole
Hi.
We have a slightly different issue …… we own a Wimpey leasehold flat (upstairs flat, own entrance, in a block of 8 flats (4 downstairs, 4 upstairs)). Peppercorn ground rent. We organise and pay for our own maintenance.
We are trying to sell the property but the buyers lenders advise the property is unmortgageable due to Wimpey not insuring the property.
We have always paid for our own insurance and wasn’t an issue when we first had a mortgage on the property (10 years ago) – property now mortgage free.
Our solicitor has asked Wimpey for a Deed of variation – Wimpy have refused. We have offered to pay for idemnity insurance but the buyers solictor/lender have rejected this.
What other options do we have to solve this?
Thanks
Hi Chris, this is an interesting one that I’ve not come across before, what does your lease state about buildings insurance? This is the only thing that will dictate if what you’re doing (organising your own maintenance etc) is correct, if it’s in the lease then there shouldn’t be a problem with the lender. I would also recommend asking the question if you haven’t already in the national leasehold Facebook group and someone else may have a similar experience with Wimpey; https://www.facebook.com/groups/786983251448976 Thanks, Nicole
Thanks Nicole.
This is what it says in the lease regarding insurance:
(G) To keep the demised premises and all buildings erections and fixtures of an insurable nature whioh at any time during the said term may be erected upon or affixed to the demised premises insured in the joint names of the Company and the Lessee against loss or damage by fire and flood and suoh other risks as are normally included in a Comprehensive Policy to the full reinstatement value thereof as determined by the Company’s Surveyor with the Norwich Union Fire Insurance Society or with such other insurance office as shall be nominated from time to time in writing by the Company and through the Agency of the Company if so required and will produce the Policy and the receipt for the current year’s premium when required and also if and whenever the Lessee shall neglect or fail to effect or maintain any such insuranoe and to produce
such receipt the Company may effect or renew and maintain the same and to repay to the
Company all moneys paid by it for that purpose with interest at the rate of Two pounds per centum per annum above the Bank Rate from time to time in force and also if and whenever any building on the demised premises shall be burnt down or damaged by fire
or otherwise to apply all moneys received under any such insurance as aforesaid in or towards reinstating the buildings so burnt down or damaged under the direction and to the satisfaction of the Company or its Surveyor or Agents (whose fees shall be payable by the Lessee) in accordance with the existing regulations and laws affecting the same of any competent authority and if the same moneys shall be insufficient for the purpose to provide out of his om moneys such further sums as may be required and to expend the same for the purpose aforesaid PROVIDED that if the Insurance Office nominated by the Company as aforesaid shall require the Lower Maisonette and the Upper Maisonette to be insured together as one property then such insurance shall be effected in such nanes
as the Company may require and the Lessee shall pay one-half of the cost thereof and all the provisions of this sub-clause shall apply so far as may be to the Lessee’s
interest in such insurance and his share of all moneys received by virtue thereof (H) To permit the Company and its Agents with or without workmen and others at all times in the daytime upon giving reasonable notice to enter upon the demised premises to examine the condition and to take plans thereof and thereupon the Company may serve notice in writing specifying any repairs necessary to be done and require the Lessee forthwith to execute the same and if the Lessee shall not within two months after service of such notice proceed diligently with the execution of such repairs
And regarding maintenance:
(e) The benefit of the covenant on the part of the lesee of the Lower Maisonette contained in the lease thereof to contribute one-half of the expense or repairing upholding cleaning maintaining supporting and renewing the roof and exterior walls of the Upper Maisonette