In an industry where transparency and simplicity are key, the world of ground rent investment often appears as an ominous enigma that buyers aren’t keen to get involved in. Here at Austin Gray, we hate to see this sector of the property market unloved, so we’ve devised this definitive handbook to help you see the light at the end of the ground rent tunnel.
When explained in simple, jargon-free terms, ground rent properties are actually incredibly simple. A property becomes a ground rent investment when the developer retains ownership of the land the property is built on, the freehold, becoming a freeholder. The occupier, or leaseholder, effectively buys the right to occupy their part of the land and property from the freeholder for a set amount of time, otherwise known as a lease. These terms are defined as follows:
- Freeholder – a freeholder owns the property and the land the property is built on. The freeholder then effectively lets the property, but not the land, to the leaseholder for a fixed amount of time, dictated by the length of the lease.
- Leaseholder – when buying a property, the purchaser will take into account the length of the lease (we’ll explain below). The purchaser will then become the leaseholder and the occupier of the property until the lease is up. When the lease finishes, the lease will return to the freeholder unless the period of time is extended prior to this happening.
- Lease – A lease is simply a contract by which the freeholder permits the use of the property to the leaseholder for a set amount of time. The lease will determine how the leaseholder can use the property and their responsibilities under the agreement.
So, how does this effect the leaseholder?
When occupying a leasehold property, such as a flat, the leaseholder does not own the property or the land but simply has the right to use that property for the period agreed by the freeholder under the terms of the lease.
In very rare circumstances when a lease runs to 0 years, the leaseholder has the right to remain as a tenant paying a market rent. In more usual circumstances, a leaseholder will make an application to extend their lease, paying a premium to do so.
Under the Leasehold Reform, Housing and Urban Development Act 1993, a leaseholder has the statutory right to extend their lease if they have owned the property for 2 years or more. If not, then they may still be able to extend, however, the freeholder has no legal obligation to do so and can, in effect, charge what they like.
Other than extending their lease, a leaseholder may decide to try and buy the freehold of their building along with other leaseholders in the block. To buy the freehold, also known as enfranchisement, requires a minimum of 50% of leaseholders within the building to participate. If the leaseholders can successfully buy their freehold, they will remain as leaseholders, however, will have a share of the freehold and, effectively, control of the building and land.
What does it mean for the freeholder?
The freeholder could be a company or an individual. Either way, the freeholder will receive the annual payment from the leaseholder, the ground rent, making freehold ownership an ideal investment.
In many respects, the freeholder may act like a landlord but tends to have slightly fewer responsibilities. Because the leaseholder owns the property for the entire duration of their lease, they are responsible for internal jobs such as wiring, internal plumbing, decoration and flooring.
In most cases, however, the freeholder remains responsible for other maintenance, including repairs to the building’s structure, including the roof and guttering, repairs to any shared parts of the building (important if the ground rent is an apartment block) and the building’s insurance. The freeholder will cover any cost associated with these repairs through the annual maintenance and service charges.
There are 2 types of buyers interested in investing in ground rents
Many investors look at ground rent investments as a good source of income, whether they are in it for the long or short-term.
Long-term investors tend to be interested in the income a ground rent investment brings in, but are also usually interested in retaining management rights of the property.
Short-term investors are usually interested in investing in freeholds with shorter leases, with the hope of selling lease extensions as well as receiving annual payments.
Austin Gray is an established, multi-disciplined firm with a wealth of knowledge in all property sectors. With a special expertise in ground rent Sales, and the issues surrounding them, the Austin Gray team is dedicated to helping leaseholders and freeholders avoid the traps and pitfalls involved in ground rents. If you need any more advice about ground rents from the chosen property specialist of a number of UK housing services, call the Austin Gray team on 01273 20 19 80.