The Council of Mortgage Lenders (CML) has confirmed that it will shortly be issuing guidance on how to handle the much publicised ground rent scandal.

The scandal relates to newbuild houses and flats sold on long leases subject to ground rent payments. In some cases, the lease provisions allow the ground rent to double every 10 years. By way of example, over the course of a 150 year term, where an initial ground rent of £250 is payable, the ground rent payable annually will rise to £8,000 from year 50, £256,000 from year 100 and over £4 million for the last ten years of the term.

The effect of these escalating ground rent clauses has been to render the value of some properties (and consequently the lender’s security) virtually worthless and these properties unsellable. In addition, tenants who wish to extend their leases under the statutory route will be forced to pay extortionate premiums which are intrinsically linked to the ground rent payable throughout the term.

In the Housing White Paper issued earlier this year, the Government said “ground rents with short review periods and the potential to increase significantly throughout the lease period may not be a fair deal” and that the Government was “absolutely determined to address this”. The Law Commission has requested views about areas of leasehold law for inclusion in their programme of law reform including the ability to challenge unfair ground rent provisions. The Government could, for example, look to streamline changes to ground rent provisions in leases which have already been granted, by introducing new legislation to cap or limit increases in ground rent or link increases to changes in the Retail Price Index.

The purpose of the CML guidance is to assist lenders in (i) determining their lending policy and (ii) to assist lenders in assessing the impact of ground rent provisions on the affordability of mortgage products, in compliance with lender’s regulatory requirements.

Nationwide Building Society last month introduced new lending criteria for newbuild properties, restricting lending to leases of at least 125 years for flats and 250 years for houses, with initial ground rents required not to exceed 0.1% of the value of the property. Following the CML’s guidance, which is expected to be published in the coming weeks, it is likely more lenders will follow suit in assessing and changing their lending policy for leasehold properties and in particular newbuilds.

Watch this space.