Managing ground rent can be challenging for many leaseholders, especially with rising costs and changing laws. One useful solution is a Deed of Variation, which allows changes to the terms of your lease.
Many leaseholders find ground rent's financial and legal aspects confusing and stressful. Recent changes in the law, such as the Leasehold Reform (Ground Rent) Act 2022, have made it even more important to know your options for dealing with ground rent.
This article will explain what a Deed of Variation is, how it works, and its effects on leaseholders.
We will cover the basics of ground rent, what a Deed of Variation involves, and the steps to get one. We will also look at the benefits and challenges, costs, and how they might affect your property’s value and marketability.
Table of Contents
- What is ground rent?
- What is the purpose of ground rent?
- What are the issues with escalating ground rent?
- What is a Deed of Variation?
- How can a Deed of Variation change ground rent terms in a lease?
- What are the implications of leasehold reforms on ground rent?
- How do I get a Deed of Variation for ground rent?
- What common terms can be negotiated for a deed of variation for ground rent?
- What are the advantages of securing a Deed of Variation for leaseholders and freeholders?
- What are the potential challenges of securing a Deed of Variation for leaseholders and freeholders?
- What triggers the need for a deed of variation?
- What are the potential costs associated with getting a deed of variation?
- Can a deed of variation affect property value or marketability?
- How can Lawhive help?
What is ground rent?
Ground rent is a fee paid by the leaseholder to the freeholder of a property. In the UK, if you own a leasehold property, you don't own the land it is built on. Instead, you have a lease from the freeholder that lets you use the property for a set number of years.
Ground rent is the payment you make for using this land. For some homeowners, ground rent doubles or increases every year. For others, it increases based on the retail price index (RPI), which can rise with inflation.
What is the purpose of ground rent?
The purpose of ground rent is to give the freeholder, who owns the land your leasehold property stands on, a regular income.
It's essentially a way for the freeholder to charge for the use of their land and helps cover the freeholder's costs for managing and maintaining the land.
What are the issues with escalating ground rent?
Escalating ground rent is when the amount of ground rent you pay increases over time, sometimes doubling every few years.
This can create several problems for leaseholders.
Rising costs and repossession risks
Escalating ground rent can become a substantial financial burden over time. Clauses that allow ground rent to double periodically or increase in line with the retail prices index can lead to unaffordable costs for leaseholders.
If a leaseholder fails to pay the increased ground rent, they could risk forfeiture of their lease, which means they could lose the property.
Marketability and mortgage challenges
Many mortgage lenders refuse to finance properties with escalating ground rent clauses due to the high risk associated with future payment obligations. This can limit the pool of potential buyers to those who can purchase without a mortgage, reducing the property's marketability.
To address these problems, the Leasehold Reform (Ground Rent) Bill was introduced for newly built properties. This new law stops ground rent for new properties and sets it at a nominal fee. However, this law does not apply to existing leasehold property with unreasonable ground rent increases.
As such, you might consider removing these clauses with Deed of Variation, which we'll cover in the rest of this article.
What is a Deed of Variation?
A Deed of Variation is a legal document that allows you to change the terms of your lease. It’s a formal agreement between the leaseholder (the person who owns the leasehold property) and the freeholder (the person who owns the land on which the property stands).
How can a Deed of Variation change ground rent terms in a lease?
A Deed of Variation is used when there is a need to update, correct, or improve the terms of the lease.
This might include:
Adjusting Ground Rent
If the ground rent is set to increase significantly, you can use a Deed of Variation to change how much you pay and how often it increases.
Changing Lease Terms
It can be used to modify other terms of the lease, such as the length of the lease, repair obligations, or any restrictions on the use of the property.
Correcting Errors
If there are any mistakes or outdated terms in the lease, a Deed of Variation can correct these issues.
What are the implications of leasehold reforms on ground rent?
The Leasehold Reform (Ground Rent) Act 2022 introduced significant changes to ground rent terms for leasehold properties in the UK.
Abolition of ground rent for new leases
One of the most important changes is the abolition of ground rent for most new residential leases.
This means that for leases granted after the Act came into effect on 30 June 2022, ground rent will generally be set at a "peppercorn rent" – effectively zero. This applies to new long residential leases of houses and flats.
By setting ground rent at zero, the reform aims to prevent leaseholders from facing escalating ground rent charges that can become unaffordable over time.
Impacts on existing leases
While the Act primarily affects new leases, there are some considerations for existing leases such as leaseholders with existing leases can negotiate with freeholders to vary their leases and reduce ground rent to zero or a peppercorn rent. This might involve using a Deed of Variation.
The Act also supports leaseholders seeking to extend their leases or purchase the freehold by providing a framework for reducing or eliminating ground rent as part of these processes.
Enforcement and penalties
Freeholders who charge ground rent on new leases can face penalties, including fines of up to £30,000 per lease.
Leaseholders who have been wrongly charged ground rent under new leases can seek refunds from the freeholder, enforced by the Trading Standards Authority.
How do I get a Deed of Variation for ground rent?
First, the leaseholder and the freeholder must agree that the ground rent terms should be changed. This could be because the ground rent is set to increase significantly, making it unaffordable, or because the current terms are outdated or unfair.
Both parties need to negotiate and agree on the new ground rent terms. This might involve:
Setting a new fixed amount that will not change over time.
Agreeing to limit how much and how often the ground rent can increase.
Lowering the ground rent to a more manageable level.
Once the new terms are agreed upon, a solicitor drafts the Deed of Variation. This document will outline the new ground rent terms and include all necessary legal language to make the changes enforceable.
Once satisfied, both parties sign the document.
After signing, the Deed of Variation should be registered with the Land Registry. This ensures that the new terms are officially recorded and legally binding.
Once registered, the new ground rent terms take effect.
What common terms can be negotiated for a deed of variation for ground rent?
A Deed of Variation is a legal document that allows changes to the terms of a lease. When it comes to ground rent, there are several common terms that leaseholders and freeholders might negotiate, including:
Reducing ground rent amount
Fixed-rate ground rent
Capping increases
Changing increase frequency
Less frequent increases
Setting ground rent to zero
Peppercorn rent
Eliminating backdated rent
Waiving arrears
Simplifying payment terms
Change payment schedule
What are the advantages of securing a Deed of Variation for leaseholders and freeholders?
For leaseholders, securing a deed of variation for ground rent allows for lower and more predictable ground rent payments and helps avoid escalating costs.
Reducing ground rent can also enhance the property's value and marketability.
For freeholders, agreeing to a vary ground rent can help foster better relationships with leaseholders.
Overall, a Deed of Variations helps create a fair and manageable lease agreement for everyone involved.
What are the potential challenges of securing a Deed of Variation for leaseholders and freeholders?
Leaseholders might face costs, such as legal fees in getting a deed of variation, difficulties in getting the freeholder to agree, and a long process.
Freeholders may have to deal with agreeing to reduced income, legal and administrative burdens that do come with deeds of variation, and potential impacts on property value.
Both parties need to consider these challenges and seek legal advice to navigate the process smoothly.
What triggers the need for a deed of variation?
Normally, if the ground rent is too high or set to increase significantly, a Deed of Variation can be used to lower it or fix it at a more affordable rate.
Or, if there are outdated or unfair terms in the lease, such as restrictions on property use or repair responsibilities, you might need a Deed of Variation to update them.
When extending the lease, the ground rent and other terms might need to be adjusted, which can be done with a Deed of Variation.
Plus, before selling a leasehold property, the buyer or lender might require certain lease terms to be changed, such as lowering the ground rent or updating usage terms, to make the property more attractive.
What are the potential costs associated with getting a deed of variation?
Hiring a solicitor to draft and review the Deed of Variation is essential. Legal fees can vary but expect to pay around £500 - £1,500 (depending on the complexity).
Following this, you will be expected to pay some administrative charges and consent fees, ranging between £200-£500, valuation fees of around £250-£600, a property survey of around £300-£700, and Land Registration fees.
In total, this could cost between £1,670-£4,450 depending on your needs.
Can a deed of variation affect property value or marketability?
Yes, a Deed of Variation can affect the value and marketability of a property by reducing or fixing ground rent and updating lease terms. However, high costs and complex negotiations might have a slight negative impact.
How can Lawhive help?
Need help with a Deed of Variation or any property-related legal matters? Lawhive's network of property lawyers is here to assist you every step of the way.
Contact us today for expert advice, transparent fees, and personalised support.