Ground rents for leasehold properties are making the news. Greedy landlords and developers are reserving very large grounds rents, which escalate over the lease term to what can be pretty gigantic sums for innocent homebuyers. Campaigns are being waged and politicians are starting to pay attention to the issue.
It is worthwhile considering why leasehold tenure of property exists as a matter of law. One advantage of leasehold property is to overcome the difficulties with making positive obligations (i.e. maintenance and repair) binding on future owners of properties in a block. It also serves freeholders’ desire to retain control over the land and units created. It is this desire that seems to be the cause of problems. The landlord wants to obtain capital for the property now but would like to retain value also in the ground rent.
A landlord can charge a rent but does not need to. It stands to reason that a capital value lease with a ground rent will have a different value from one that does not. The greater the rent – or even the ambiguity about rent - the less the capital value. There is nothing inherently wrong in having rents. If people are unable to pay the full value of a freehold or a virtual freehold now, then a rent is a way of maximising the value the buyer can have up to the level they are willing to pay. The ground rent reserves to the landlord the element of value that the buyer cannot pay.
This is useful where asset prices rise and is common in social housing/shared ownership properties. All prices are relative.
Where does the professional sit within this? The solicitor's role is to understand what the rules are, and whether they make legal and practical sense: can you enter your flat; will someone repair the roof; who pays for what etc? What a solicitor cannot do is value the property, and this extends to ground rents. We can advise you that they exist, and we can advise you how they are calculated. We will always warn you when something looks unusual, or has a surprising effect, and when the application of assured tenancy rules might inadvertently affect long leaseholds. It is, however, for an expert valuer to assess the value of the flat, taking into account the lease terms and ground rents.
Escalating ground rents need to be identified, understood and valued. A professional adviser’s job is to ensure their client comes to an informed decision. A valuer will tell you how much it should concern you, and you may decide to walk away, reduce your offer or deal with matters in some other way.
Doubtless there will be some greedy landlords who have "got away with it", but the assumption should not be made that escalating ground rents are necessarily bad. The key is to take the best advice available, and judge each situation on its facts.
David Stockley is a partner at TWM Solicitors
