Ground Rent: How It Is Used To Value The Freehold
The value of ground rent (i.e. the freeholder interest) consists of a multiple of the current charge and depends on a) how many years are left unexpired on the lease, b) any future increases in the level of ground rent, (either fixed or geared through the rent review clauses), c) market interest rates and d) the possibility of default by the leaseholder as the owner of the ground rent will have precedence over all other creditors, including mortgage lenders and HMRC. The most prevalent method of increasing the ground rent used by house builders when they draw up the leases is that of fixed uplifts with increments varying greatly in range.
Another is a regular rise according to the corresponding Retail Price Index (which in December 2014 was 257.5) which allows the rent to track inflation or the House Price Index, or as a percentage of the capital value of the property.The developers will also want to maximise their profits so they often sell ground rents (pre-packaged in bulk) to ground rent investors before construction starts with the investors paying a large deposit up front which will be used to fund building costs. The sale and exchange of contracts is agreed upon very early in the process because one of the conditions will usually be that completion takes place on a notice served by the developers at a fixed period after the sale of the last flat. If developers don’t want the building of the development slowed down by having to issue Section V notices to the leaseholders under the Right of First Refusal, as long as the sale of the ground rents occurs before half of the flats are sold, the need for serving such a notice is by-passed. It’s not actually illegal because legislation requires there to be a majority of leaseholders willing to accept the right. If less than half of the leases have been granted then such a majority simply does not exist!