ground rent

Ground rent, sometimes known as a rentcharge is a regular payment required under a lease from the owner of leasehold property, payable to the freeholder. A ground rent is created when a freehold piece of land or a building is sold on a long lease.^[1] The creation of a ground rent on land provided an income to the landowner, while the builder would lease the land to build the house and then sell it on completion. A building can be either sold as a single house or divided as flats.^[2]

Ground rent should not be confused with Chief Rent (confusingly also known as a rentcharge) payable on some freehold property in North West England,^[1]

History

In Roman law, ground rent (solarium) was an annual rent payable by the lessee of a superficies (a piece of land), or perpetual lease of building land. In early Norman England tenants were able to lease their title to land such that the land-owning lords did not have any power over the sub-tenant to collect taxes. However, in 1290 King Edward I passed the Statute of Quia Emptores that prevented tenants from leasing their lands to others through subinfeudation. This created a system of substitution, where the tenant's full interest would be transferred to the purchaser or donee, who would pay a rentcharge.^[1] This system later passed into common law in England and was adopted by many nations which trace their legal heritage to Britain.

Valuation

The value of the freehold interest comprises:

• A multiple of the current annual ground rent payable, which will depend on
  • the outstanding term of the lease
  • any future increases in the level of ground rent
  • market interest rates
  • the probability of default
• The net present value of the reversion, i.e. at the end of the lease the freeholder (the person to whom the rent is paid) will probably be fully entitled to the property, so the shorter the lease the greater the reversion value.
• Any attributable "marriage value" (a substantial sum designed to compensate freeholders for their loss of interest when a lease with less than 80 years to run is extended).

United Kingdom

In the United Kingdom, the rights of residential tenants owning property subject to a long lease at a ground rent are governed by the Leasehold Reform Act 1967 for houses and the Leasehold Reform, Housing and Urban Development Act 1993 for flats.

English

In English law, it appears that the term "ground rent" was at one time popularly used for the houses and lands out of which ground rents issue, as well as for the rents themselves.^[3] Lord Eldon observed in 1815 that the context in which the term occurred may materially vary its meaning.^[4]

The contemporary accepted meaning of ground rent is the rent at which land is let for the purpose of improvement by building; i.e. a rent charged in respect of the land only, and not in respect of, the buildings to be placed thereon. It is therefore usually lower than the rent that might be achieved for a building let on the open market, and is for a far longer term of years (at least 21 years, but more commonly 99 years or 125 years, or even 999 years). However, inflation has eroded the value of most ground rents with long leases and non-rising incomes, so the value is now marginal where there is no prospect of a reversion (when the ownership of the property reverts back to the freeholder) within 150 years

The Commonhold and Leasehold Reform Act 2002 and the "The Landlord and Tenant (Notice of Rent) (England) Regulations 2004" now govern the form of notice that needs to be issued to collect ground rent. Previously there had been a problem with some landlords sending confusing or dishonest demands for payments to tenants.

The final sanction available to a landlord faced with a leaseholder in breach of his lease due to the failure to pay the service charges, ground rent or administration charges, is to forfeit the lease and to repossess the house or flat. To do this the landlord must first serve a valid notice under section 146 of the Law of Property Act 1925, the Notice of Seeking Possession. However, The landlord cannot serve a section 146 notice where the amount of service charges, administration charges or ground rent owed (or a combination of all of these) total less than £350, or have been outstanding for less than three years.^[5]

Under the provisions of The Rentcharges Act 1977, Lessees can free themselves of any annual rentcharge created before 22 August 1977, by applying to make a lump sum payment through the Government Office for the North West (GONW). Although many rent owners will try to make a private settlement with the rent payer,^[6] the Act provides a formula which enables GONW to calculate the redemption figure that the rent payer has to pay the rent owner in order to redeem their rentcharge. When the transaction has been completed GONW, on behalf of the Secretary of State, issues a redemption certificate to the rent payer. Such rentcharges still in existence by 2037 will be extinguished.^[1]

Scottish

In Scots law, the term ground rent is not employed, but its place is taken, for practical purposes, by the ground-annual, which bears a double meaning:

• 1/ At the time of the Reformation in Scotland, the lands of the Church were parcelled out by the crown into various lordships, the grantees being called "Lords of Erection". In the 17th century these Lords of Erection resigned their superiorities to the crown, with the exception of the feu-duties, which were to be retained till a price agreed upon for their redemption had been paid. This reserved power of redemption was, however, resigned by the crown on the eve of the Union and the feu-duties became payable in perpetuity to the Lords of Erection as a ground-annual.
• 2/ Speculators in building ground usually grant sub-feus to builders at a high feu-duty. But where sub-feus are prohibited—as they might have been prior to the Conveyancing (Scotland) Act 1874—and there is much demand for building ground, the feuars frequently stipulate that the builder pay an annual rent rather than purchase the land outright. This annual rent is called a ground-annual. Interest is not due on arrears of ground-annuals and, like other real burdens, ground-annuals may now be freely assigned and conveyed.

Sale of ground rents in the UK

There are a number of companies which specialise in buying ground rents for long term investment from landlords who want to sell their ground rents. Normally they focus on purchasing reversionary ground rents, either for initial income or for the opportunity of a reversion of the underlying property at some point in the future. The value of ground rents is affected by the rent review pattern on future income increases, the value of the underlying property, the unexpired lease length and whether marriage value is applicable.^[7][8]

Prior to selling ground rents it is a statuatory obligation incumbent on both parties to the transaction, that Section V notices are served on the long leaseholders. This gives them a two month period within which to respond. Upon expiry of the notices, a transaction can proceed at the price stated on the notice or higher (but not lower) for up to 12 months subsequently. The only way this can be avoided is for exchange of contracts on the ground rents sale of flats to have taken place prior to 50% of the flats being sold. This then allows completion upon sale of the last flats without the need for Section V notices.

United States of America

The term ground rent in the English sense does not seem to be generally used in the United States, but is applied in Pennsylvania to a kind of tenure, created by a grant in fee simple, the grantor reserving to himself and his heirs a certain rent, which is the interest of the money value of the land. These ground rents are real estate, and, in cases of intestacy, go to the heir. They are rent services and not rent charges, the statute Quia Emptores never having been in force in Pennsylvania, and are subject to all the incidents of such rents. The grantee of such a ground rent may mortgage, sell, or otherwise dispose of the grant as he pleases; and while the rent is paid the land cannot be sold or the value of the improvements lost.

A ground rent being a freehold estate, created by deed and perpetual in duration, no presumption could, at common law, arise from lapse of time, that it had been released. But, by statute (Act of 27th of April 1855, s. 7), a presumption of release or extinguishment is created where no payment, claim or demand has been made for the rent, nor any declaration or acknowledgment of its existence made or given by the owner of the premises subject to it, for the period of 21 years. Ground rents were formerly irredeemable after a certain time. But the creation of irredeemable ground rents is now forbidden (Pennsylvania Act 7 Assembly, 22nd of April 1850).

Ground rents are also found in some portions of Maryland, primarily in the Baltimore area. These are typically 99-year leases, renewable in perpetuity, subject to a semi-annual rent payment. Under Maryland law, the tenant of a residential property has the right to redeem the ground rent for a one-time payment and obtain full title to the property. If the renter does not pay, the ground rent holder can go to court and have a lien placed against the house for the value of the ground rent. An emergency bill was presented by Democratic Maryland Governor Martin O'Malley to completely ban new ground rents in Maryland in 2007; the bill was passed by the legislature, though it is being contested in court. Victor Posner began his career in Baltimore in the business of building house shells for Blacks on property retained under ground rents.

External links

• Special Baltimore Sun Series on Ground Rent and Changes Prompted by the Series in Baltimore City
• UK Rentcharges Act 1977 at propertylawuk.net
• The Leasehold Advisory Service UK: Service charges and other issues
• The Government Office for the Northwest UK
• "A way out of ground rent" from the Manchester Evening News
• "Ground Rents - An explanation" from Landlordzone
• "Primelocation Ground Rent Guide"
• "The Landlord and Tenant (Notice of Rent) (England) Regulations 2004"

Notes

• For English Law see Foa, Landlord and Tenant (3rd ed., London, 1901)
• Scots Law, Bells Principles (10th ed. Edinburgh, 1899)
• American Law, Bouvier, Law Dict. (Boston and London, 1897).
• "Mystery of ground rents is solved with a few facts". (August 19, 2001). Baltimore Sun, p. 3L.
• "End ground rent evictions, O'Malley says". (February 1, 2007). Baltimore Sun.

References

This article incorporates text from the Encyclopædia Britannica, Eleventh Edition, a publication now in the public domain.