Frequently Asked Questions
What are freehold ground rents?
When a residential development is constructed or a building converted into flats, the individual flats are sold off on long leases - (usually originally 99 or 125 years) - and the developer retains the freehold.
This residual freehold element is known as a Ground Rent Investment.
As the lease term diminishes the value of the freehold increases.
Who buys ground rents?
There are two types of purchasers:
1) The Long Term investor
They purchase not only for the ground rent income, but usually also for the management rights. They usually purchase off a multiple of the ground rent income where the leases are long.
2) The Short Term investor
These investors are usually not so interested in the management income and may pass over the management of the building to an independent firm. They are more interested in the ‘hope’ value attributed to short lease flats. As the leases diminish, the value of the freehold increases and they are purchasing based on the ‘hope’ value of effecting lease extensions to the leaseholders.
What are the Valuation considerations?
The valuation and marketing of these Ground Rent investments requires a detailed understanding of the lease extension and enfranchisement issues under the Leasehold Reform, Housing and Urban Development Act 1993 (as amended) in which Austin Gray have specialised since the commencement of the Act.
How are ground rents marketed?
Any disposal of a property of two flats or more, (comprising two qualifying tenants), are fixed by the provisions of the Landlord and Tenant Act 1987, section 5a (as amended), which gives the lessees the Right of First Refusal of any sale. A two month Notice is required to be served upon the lessees and a price must be provided in the Notice. The lessees then have the right to purchase the property at the price in the Notice, providing they serve a correct Counter Notice - (at least half of them need to get together to do this jointly). If they do not serve the Counter Notice within those two months you are free to sell the property, but not at a lower price than the price in the Notice. It is critical, therefore, to get the Notice price right. How we deal with this is to market the property initially to the ground rent investment market and obtain the best possible offer. Once we have obtained this, we will then advise your solicitors to use this price and insert it into the Notice that you will have to serve on the lessees. That Notice will give all of the lessees the Right of First Refusal at the price within the Notice. There is a risk that if you obtain an offer and serve a Notice, and the lessees do not Counter Serve, the ground rent investor could change his mind. If we are then unable to find another investor to purchase at the same price, then the Notices may have to be reserved at a lower price if that is all we can achieve. There is an alternative for a disposal of this type of investment, which is by auction, but there is a different Notice and a 4-6 month period required.
How can Austin Gray help you?
We sell Ground Rent investments around the country - some of our recent sales are detailed in Case Studies.
Alternatively, we can attempt to effect lease extensions to the lessees in the first instance in order to maximise your position.
Please contact Stewart Gray FRICS to discuss on 01273 20 19 88, or email