The subject of ground rent has now become a point of political interest and you may have seen some of the recent interest in this area. Who would have thought that ground rents would make it to the front page of the Times?
Following on from Sajid Javid’s announcement that the government is going to look in more detail on the question of ground rent and leasehold houses and particularly banning the creation of ground rent for new leasehold houses, the whole question of ground rents more generally looks set for debate. The government’s current consultation indicates that Parliament may well look at the question of ground rents for all leases of more than 21 years.
In this article Mark Chick of Bishop & Sewell takes a look at why leases have a ground rent and why landlords like to receive this. Mark recently appeared on ITN commenting on this issue.
So, what is a ground rent and why do leases have this?
Put very simply a ground rent is a sum of money payable under a lease to the landlord or freeholder. It is a form of 'rent' but is normally relatively ‘nominal' when compared to the value of the property and the length of term of the lease.
Normally the concept of a 'ground rent' is associated with a lease of say, 99, 125 or even 999 years when granted. The person buying the leasehold property pays a capital premium to buy the lease (normally many thousands of pounds) and then also pays a smaller sum over time to the person who owns the 'ground' the property is situated on.
So, why do we have ground rents?
The answer lies in part in legal history. Initially, in order to grant a lease you needed to have a specified set of premises, a defined length of time for the lease to run (the lease 'term') and also a rent.
We should also address the question of why we have leases in the first place, but this is a separate question.
In other words, historically a lease couldn't be granted unless a rent was payable. For this reason, when long leases were granted for a premium, a small rent was also retained to be paid to the landlord under the lease.
Later on, the requirement that a lease must have a rent fell away, but the custom of granting long leases with a ground rent has continued.
Initially, perhaps out of custom and practice, and latterly for commercial reasons, ground rents have remained popular with landlords.
Many, but by no means all modern developments have leases of flats granted with ground rents payable.
Often there is a 'nil' or zero ground rent called a 'peppercorn' ground rent.
This stems in history from the need for there to be some kind of rent or 'consideration' payable to use the legal term. At one point in time, peppercorns like all other spices and salt, were valuable commodities and therefore had 'value' thereby solving this problem. However the phrase a peppercorn ground rent today means a nil or zero ground rent with nothing to pay.
A peppercorn, or nothing to pay
Colloquially, people often confuse the two concepts of a 'low' ground rent and a zero ground rent but if there is a low ground rent of say £50 per annum this is not a peppercorn ground rent and it is not correct to describe it as such.
So why have a ground rent today? Well, it might not seem like much if you have to pay £100 or so to the freeholder every year - perhaps in one or two chunks with your service charge payments, but you can see perhaps if there are a lot of flats - and particularly if you own a lot of ground rents - then all this adds up.
An investment in the hands of the freeholder
In particular, ground rent is a contractual commitment to pay a fixed sum of money and is lawfully due no matter what. It may even be subject to review or escalation which actually therefore represents particularly good long term value when you consider the uncertainties and risks of say, the stock market as a way of producing long term stable income.
Ground rents will never 'set the world on fire' in investment terms, but they do represent a good long term stable income source, with the added bonus that as the lease gets shorter the capital value of the investment will increase as the possibly of selling either the freehold or a lease extension begins to materialise.
No wonder therefore that ground rents are as popular today as they ever were and it is even more interesting that they are now the subject of debate.
Mark Chick is a partner at Bishop & Sewell LLP