Ground rent
As a legal term, ground rent specifically refers to regular payments made by a holder of a leasehold property to the freeholder or a superior leaseholder, as required under a lease. In this sense, a ground rent is created when a freehold piece of land is sold on a long lease or leases. The ground rent provides an income for the landowner. In economics, ground rent is a form of economic rent meaning all value accruing to titleholders as a result of the exclusive ownership of title privilege to location.
History
In Roman law, ground rent was an annual rent payable by the lessee of a superficies, or perpetual lease of building land.In early Norman England, tenants could lease their title to land so that the land-owning lords did not have any power over the sub-tenant to collect taxes. In 1290 King Edward I passed the Statute of Quia Emptores that prevented tenants from leasing their lands to others through subinfeudation. This created a system of substitution, where the tenant's full interest would be transferred to the purchaser or donee, who would pay a rentcharge. This system later passed into common law in England and was adopted by many nations which trace their legal heritage to England.
Classical economists and Georgists quantify ground rent to investigate and capture unearned income called economic rent, as distinct from income derived from labour.
Valuation
The value of the freehold interest comprises:- A multiple of the current annual ground rent payable, which will depend on
- * the outstanding term of the lease
- * any future scheduled increases in the level of ground rent
- * market interest rates
- * the probability of default
- * if the rents for individual flats etc. are small, the cost of collection
- The net present value of the reversion, i.e. at the end of the lease the freeholder will probably be fully entitled to the property, so the shorter the lease the greater the reversion value.
- Any attributable "marriage value".
United Kingdom
In the United Kingdom, the rights of residential tenants of property subject to a long lease at a ground rent are governed by the Leasehold Reform Act 1967 for houses and the Leasehold Reform, Housing and Urban Development Act 1993 for flats.England and Wales
In English law, it appears that the term "ground rent" was at one time popularly used for the houses and lands out of which ground rents issue, as well as for the rents themselves. Lord Eldon observed in 1815 that the context in which the term occurred may materially vary its meaning.The contemporary accepted meaning of ground rent is the rent at which land is let for the purpose of improvement by building: i.e. a rent charged in respect of the land only, and not in respect of the buildings to be placed on it. It is therefore usually lower than the rent that might be achieved for a building let on the open market, and is let for a longer termat least 21 years, but more commonly 99 years, 125 years, or even 999 years. The benefit to the freeholder of this arrangement was that the freehold land owner would obtain possession of the improved land, i.e. the land with the building constructed upon it, on lease expiry. The given freeholder would likely be deceased by that time but land owners often considered benefit to future generations of their family in the era of a land owning class.
There was substantial residential development in the cities of the UK in the Victorian era, much of it on land acquired by developers from freehold land owners on ground leases. By the early 20th century the politics of property ownership was changing and there was a recognition that many working people were living in accommodation which they did not truly own, they had purchased a wasting asset and could lose their homes on expiry of the ground lease on it. Over that century various pieces of legislation were enacted to grant greater security of tenure to residential leaseholders by granting leaseholders the entitlement to extend their lease. Freeholders found that the reversion of the property to them was being pushed further into the future and this, allied with the rise in corporate property ownership requiring shorter term investment returns, led some freeholders to consider the ground rent itself a form of investment and in many cases sought to maximise it. In the second half of the century it became common to incorporate rent review provisions into ground leases and towards the end of the century some of these rent review provisions were designed to maintain or increase the real value of the rental stream and were considered onerous on leaseholders. A market in residential ground rent investments arose. By the close of the 20th century many housebuilders were selling properties on ground leases - even if there was no intrinsic reason to do so - in order to create an income stream which could be sold to investors, in addition to the sale of the property itself on a long lease.
The Commonhold and Leasehold Reform Act 2002 and associated regulations now govern the form of notice that needs to be issued to collect ground rent. Previously there had been a problem with some landlords sending confusing or dishonest demands for payments to tenants.
Under the terms of a lease agreement, the freeholder grants permission for a leaseholder to take possession of the property for a specified period of time. This could range from 21 years to 999 years, and during this time, the leaseholder will pay ground rent to the freeholder. Freeholders lease property primarily for the initial premium paid by the original leaseholder for granting the lease; but in addition ground rent will be payable over a long term, and this may be an attractive fixed income investment for some types of investor. The final sanction available to a landlord faced with a leaseholder in breach of the lease due to the failure to pay the service charges, ground rent or administration charges, is to forfeit the lease and to repossess the house or flat. To do this the landlord must first serve a valid notice under section 146 of the Law of Property Act 1925 – a Notice of Seeking Possession. However, the landlord cannot serve a section 146 notice where the amount of service charges, administration charges or ground rent owed unless the unpaid amount is more than £350 or consists of, or includes, an amount that has been outstanding for more than three years.
There are a number of companies which specialise in buying ground rents for long-term investment from landlords who want to sell their ground rents. Normally they focus on purchasing reversionary ground rents, either for initial income or for the opportunity of a reversion of the underlying property at some point in the future. The value of ground rents is affected by the rent review pattern on future income increases, the value of the underlying property, the unexpired lease length, and whether marriage value is applicable.
Before selling ground rents, statute obliges the transactional parties to serve Section V notices on the long leaseholders. This gives them a two-month period in which to respond. Upon expiry of this, a transaction can proceed within 12 months at the price stated on the notice or higher. The only case in which such notices are irrelevant is for exchange of contracts on the sale and purchase of the ground rent of flats before 50% of them were sold. This then allows for the sum to pass and ground rent rights in return, even after all the flats are sold, without individual notices. However the rentcharge buyer is wise to note the pending contract on the freehold title.
Before 2003 the Land Registry recorded the ground rent, and the rent is evident from the register of title from their website. From 13 October 2003 the Land Registry no longer does so, and a more studied examination of the downloaded lease is needed.
Ground rent scandal
In the past, ground rent was usually not onerous, at typically around £100 per year, and often freeholders would not request payment. But in the 2010s, developers and builders often granted leases for new homes with ground rents as high as £1000 per annum, with escalation clauses doubling them every 5 or 10 years. This can result in immediate and/or subsequent mortgage refusals from lenders and their valuers, which makes the property sellable below the market price.Leaseholders have a right after two years to extend a lease with less than 99 years to run and reduce ground rent to a "peppercorn", i.e. close to zero, but developers have thwarted this with costly leases of more than 150 years that make the valuation – based on the ground rent and term – beyond the reach of leaseholders, and sell the freehold – often before the development is finished – to exploitive offshore companies.
The English and Welsh "ground rent scandal" has been widely reported in the press. In 2016 MP Peter Bottomley described excessive ground rents as "legalised extortion". In response to questions raised by the MP, communities secretary Sajid Javid said: "We must make sure the kind of abuses he mentioned are stamped out and we will continue to do everything . We do work with a number of stakeholders and we can certainly see how we can do more."
In June 2018 the UK government announced that leasehold tenure would be reformed, with new long leases having zero ground rent. This promise was fulfilled with the Leasehold Reform Act 2022, which mostly prohibited ground rent greater than one peppercorn per year on new leases.
Scotland
In Scots law, the term 'ground rent' is not employed, but its place is taken, for practical purposes, by the ground annual, which bears a double meaning:- At the time of the Reformation in Scotland, the lands of the Church were parcelled out by the Crown into various lordships, the grantees being called "Lords of Erection". In the 17th century these Lords of Erection resigned their superiorities to the Crown, with the exception of the feu-duties, which were to be retained until a price agreed upon for their redemption had been paid. This reserved power of redemption was, however, resigned by the crown on the eve of the Union and the feu-duties became payable in perpetuity to the Lords of Erection as a ground annual.
- Speculators in building ground usually granted sub-feus to builders at a high feu-duty. But where sub-feus were prohibited – they might have been prior to the Conveyancing Act 1874 – and there is much demand for building ground, the feuars frequently stipulated that the builder pay an annual rent rather than purchase the land outright. This annual rent is called a ground annual. Interest is not due on arrears of ground annuals and, like other real burdens, ground annuals could be freely assigned and conveyed.