Nationwide announced recently that it will not lend on new build residential leasehold properties if the amount of ground rent is more than 0.1% of the purchase price.

This change has been introduced by Nationwide in part to protect the marketability of the property from what Nationwide describes as “unreasonable multipliers”, such as ground rents doubling every five, ten or 15 years.

As many of our readers will be aware, ground rents are annual rental payments made to the freeholder under a long lease of a house or flat.  The amount payable can range from practically nothing (a “peppercorn” rent) to a significantly greater sum.  Last year, we blogged about the dangers of a ground rent which doubled every 10 years in the lease of a flat, which theoretically resulted in the annual ground rent ending up as millions of pounds.

Nationwide’s announcement brings welcome transparency to the type of ground rents that lenders will consider to be onerous.  This is helpful for occupiers, but also for developers, many of whom will factor future ground rent income into their viability assessments when planning developments.

Nationwide’s view is that escalating ground rents should be index linked, such as to the Retail Prices Index (RPI).  Index linked increases are seen as fairer than a doubling or other fixed % uplift ground rent, but they are no less complex, and bring their own issues.

Future rent payable is uncertain (and could end up being more than 0.1% of the value of the property).  Careful attention must be paid to the way in which the provisions are drafted, otherwise the unwary can fall into traps (such as compounding RPI increases).  And of course the provisions must cater for future changes in the way in which the RPI is calculated, or even if it is abolished (less likely for a 10 year lease, much more likely for a 999 year lease!)

Whatever the merits of increasing ground rents, as the doubling ground rent scenario demonstrates, any increase in rent should be drafted in a way that is clear and transparent, so that it can be more easily understood by both leaseholders and landlords.