Ground rent is the annual amount payable to the freeholder (known as the freeholder interest) in return for the granting of a long lease.
All collected ground rent should be held and accounted for in a separate bank account to that of service charges. It is important to be aware that if ground rent is not collected then there will be no money in the company account to pay for the annual return, directors and officers liability insurance and other charges that do not come out of the service charge account.
Since the 28th February 2005 any demand for ground rent by a freeholder, (or their managing agents), must be made in a ‘prescribed form’ as set out in s166 of the Commonhold & Leasehold Reform Act 2002 (requirement to notify long leaseholders that rent is due) and which ‘may’ be sent by post to the address on which the ground rent is payable. If the leaseholder has notified the landlord in writing of a different address in England & Wales at which he wishes to be given notices, then they must be sent there.
If this is not adhered to then the leaseholder is not liable to make payment until it is. Again, under s166, whilst the ability to demand ground rent has not been lost if the the freeholder attempts to add legal or administrative charges for non payment based on incorrect demand notices, then these charges will not be payable.
The payment date in the notice cannot be earlier than 30 days from the date notice is given, nor can it be more than 60 days after that date. What will override this however is that the date for payment cannot be earlier than the date set out in the lease itself.
Under s167 of the 2002 Act (failure to pay amount for a short period) a landlord cannot use the forfeiture procedure under the lease unless the amount owed for ground rent, service charge or administration charges (or a combination of them) is more than £350. However, the forfeiture procedure can be used even if the amount is less than £350, if it has been outstanding for more than 3 years. Ground rent can be recovered for up to 6 years in arrears.
GROUND RENT VALUE
The value of ground rent 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.
Ground Rent Increases
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!
More Than One Freeholder
Some leasehold properties actually have more than one freeholder because whilst a freeholder holds what is known as superior else, they can choose to sell what is called an ‘intermediate’ lease to someone else, who is known a head lessee. This then results in 3 different levels of ownership in the building:
- The freeholder who has the highest level of overall ownership;
- The head leaseholder (also called the head lessee) who is directly responsible to the leaseholder;
- The leaseholder.
This head lessee may make profit from his title, if the ground rent collected from all the other leaseholders in the block exceeds the ground rent payable by him to the freeholder. A head lessee can also hold a reversionary interest (the right to get the lease back once the term expires) if he is granted a longer lease term than the other leaseholders, for example 125 years against 99 years. So with a 26 year longer lease than the others, the head lessee has the right to all those flats before they would have to be returned to the freeholder.