Due to the recent negative publicity around doubling and other types of escalating ground rents, a number of freeholders and their managing agents have been writing to homeowners sending offers to convert their existing ground rent review clauses to review clauses linked to the Retail Price Index (RPI).
In fact, in 2019, a number of developers pledged to agree to Deeds of Variations where the leases contained doubling ground rent clauses to convert them to RPI linked clauses. Whilst an RPI linked clause might seem more favourable than a doubling ground rent clause, this offer of a variation is only a partial remedy to the problem as RPI clauses may also be onerous and arguably, more uncertain.
What is a Deed of Variation?
A Deed of Variation allows parties to agree to vary terms within an existing lease. An example of this is as mentioned above, freeholders are now aware that ground rent is an issue, therefore, they are suggesting variations to change the figure of ground rent or the clause itself.
A leaseholder may want to agree to a Deed of Variation with the freeholder to ensure that future increases of ground rent are reasonable and affordable.
Why a Deed of Variation?
A leaseholder may seek to agree to a Deed of Variation with a freeholder before the property purchase to assist in marketing the property. Many lenders are refusing to lend on a leasehold property that has an onerous ground rent clause.
Similarly, we are hearing of many cases where buyers (and their solicitors) are asking for Deeds of Variation so that they are not lumbered with properties with high and escalating ground rents which could rise to unmanageable levels.
The costs of a Deed of Variation
The costs of a Deed of Variation are dependent on the freeholder. However, we often see that there is a premium payable to the freeholder and a payment due on account of their legal costs.
The leaseholder should also obtain independent legal advice in relation to the Deed of Variation, incurring further costs.
What should you do if you have been offered a Deed of Variation to vary the ground rent by your freeholder?
If you have been offered a Deed of Variation to vary your doubling ground rent, you should get in touch with us. RPI linked ground rent clauses may be considered to be onerous due to their uncertain nature.
The Competitions and Markets Authority (CMA) issued a Leasehold Report dated 28th February 2020. Within this report, they comment that they have concerns regarding ground rent clauses where the amount of increases are frequently unclear or uncertain. They explicitly state that they have significant reservations about RPI linked increases to ground rent.
In recent times, some lenders have had concerns about RPI linked ground rent clauses that escalate frequently, especially where the starting level of the ground rent is more than 0.1% of the purchase price.
According to recent publications, RPI is likely to increase to 5% which might create unmanageable levels of ground rent for many homeowners (click here to read our blog about this increase). Therefore, the RPI linked clause may not provide a complete solution for you and still create issues with mortgage ability and saleability.
We can advise you as to the best way forward upon receiving an offer to vary your lease.
What should you do if you have not been advised regarding the ground rent term and have already incurred costs in entering into the Deed of Variation?
At Nelsons, we regularly handle cases where our client’s conveyancing solicitors failed to advise them on the implications of a ground rent provision within the lease prior to the property purchase.
We note that a growing number of homeowners are now experiencing difficulties in marketing their properties and are coming up against lenders will refuse to offer mortgage terms. Some of these clients have gone ahead and incurred costs in entering into the Deed of Variation in an attempt to sell the property.
In this instance, we can seek to recover the additional costs that you have incurred in entering into the Deed of Variation.