What is ground rent?

What is ground rent?

It’s not very often you find something a little wacky on a housing contract? They’re pretty serious things - but maybe the one exception can be ground rent. If you’re a leaseholder it’s not too uncommon to find out that if the freehold owner demands it you’ll owe them a peppercorn, or even a single red rose!

Confused? Wondering what we’re going on about? Don’t worry we’re going to break it down for you right now, answering all your questions. From what does ground rent mean, to how much it could cost you. Let’s get started.

Ground rent meaning

So, first thing’s first: what is your ground rent? If the agreement you have on your home is a leasehold, then you might have to pay some form of ground rent. This is a payment to whoever owns the land your home is on - they’re usually referred to as the freeholder.

Another name for ground is “chief rent”. Ground rent is also sometimes confused with service charge if you’re living in a block of flats, but they’re actually separate costs! Your service charge should go towards maintaining the property you’re living in - think along the lines of hiring cleaners for common areas or fixing broken lifts. The ground rent, on the other hand, doesn’t come with any added actions for the landowner, just that they need to ask you for it.

If the owner of the freehold wants to collect ground rent from you, they’ll need to ask you for it. This is often known as a “demand” and has some specific rules that the freeholder will need to follow. The request needs to be in writing and should include your name, how much you need to pay, the period this ground rent covers, the freeholder’s name and address, and the date the payment is due. If they don’t send you this, you shouldn’t need to pay ground rent.

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Why do I pay ground rent?

So you’ve heard the ground rent doesn’t actually pay for anything related to the property you’re leasing. You might be asking yourself, what are you even paying for? Why do I pay ground rent?

Well, many people would agree with you. In fact, since June 30th 2022, new leaseholders are no longer allowed to be charged ground rent in England. Leases that started before then, will in most cases, still need to follow the ground rent rules outlined in their contract - so ground rent isn’t totally gone for good.

But why was it around for so long in the first place? It’s down to a rule in English law that says contracts need something called “consideration”. This basically means that there needs to be something on the line that ensures whatever’s being promised in the contract is actually enforced. In this case, your ground rent is the consideration, and it needs to be paid regularly throughout your lease because the lease is a long-term agreement.

How much is ground rent?

There’s no universal cost for ground rent. It can be as low as £10, or even higher than £500 - that is, if you even have to pay it. For those that do have a ground rent payment included in their lease, you might be wondering, how is ground rent calculated? Again, there’s no hard and fast rule here. Sometimes it will be 0.1% of the property’s value each year, sometimes it can be a number that’s seemingly picked out of thin air.

Your ground won’t always be a fixed number either, some leases have what’s known as an “escalating” ground rent. This means that its value will increase over the course of your lease.

Ground rent wasn’t designed to be an additional high cost that leaseholders have to pay, but the average in the UK is now around £300. As a result, the government banned charging ground rent on leases in England and Wales on June 30th 2022.

If you’ve seen a peppercorn or a single red rose listed in your lease as your ground rent, and you’re thinking “what is a peppercorn ground rent?”, the answer is actually quite simple! This is what’s known as a token or nominal rent. It essentially means that you don’t have anything to pay, but as ground rent should be included in your rent, a peppercorn (or some other token!) is listed instead.

A few final tips…

Ground rent might seem like a strange concept altogether - why are you paying another rent to live somewhere that you probably already have monthly payments for? It does take a moment to wrap your head around it. That’s partially why new leases should no longer include ground rent in England and Wales!

The ban on having ground rent on new leases from June 30th this year is a great step forward - but be careful it doesn’t mean all ground rent has totally disappeared! If your lease existed before this date and included ground rent, you’ll likely still need to pay it if the owner of the land demands it. If you extend your lease under the Leasehold Reform Act of 1993, however, then your ground rent will revert to being a peppercorn.

There are lots of variations on the rule, so when in doubt get your research cap on! When in doubt, GOV.UK is a great place to start. We’ve also got some other great blogs on having a share of the freehold, top tips for first-time home buyers, and flying freeholds.