Residential Ground Rents – Good Grief – What are They?

Posted by Clive Emson Auctioneers on 24th January 2022 -

Those interested in property will have no doubt come across the phrase ‘Ground Rents’ and these feature regularly in our auctions. 

Many are unsure as to what they are or if they buy one what exactly have they bought. As the auction market reaches out to the inquisitive prospective buyer and more first timers it’s understandable that we receive calls asking “Can I buy that flat for a few thousand pounds?” It’s a pleasure to explain what they are to that individual, but the simple answer is, no. Remember if you don’t know the answer to a question it’s never a silly question! And as the saying goes wisdom is only knowledge when its shared.

So here’s a brief insight it to the world of ground rents. A Ground Rent is an annual charge (sometimes payable quarterly, half yearly or once a year) levied by the freeholder on the leaseholder of a property. The leaseholder has the exclusive use and enjoyment of a property by way of that lease agreement for a certain period of time (hence why the leaseholder is sometimes referred to as a ‘tenant’) – it’s applicable to flats but can also apply to houses. The length of a lease can vary but traditionally they are for a 99, 125 or sometimes 999 years.

Concentrating on flats, as these are the majority of the ground rents lots we offer on behalf of our clients – they exist where a building is constructed or converted into a number of flats and these flats are sold on long leases, as I say often for a term of 99, 125 or 999 years. A ground rent is the amount the leaseholder must pay to the freeholder, effectively for the land the building sits on. It can be anything from a rose, a peppercorn, £1, a few pounds or several hundreds of pounds. Some ground rents are fixed for the period of the lease while others may rise through the term at certain ‘review points’.

The freeholder may also have obligations under the lease. It could include buildings insurance, management and maintenance of the external and/or communal areas (eg roof, external walls, gardens, internal hallways, stairs, lifts etc). There will often be clauses in the lease  where the leaseholders is required to reimburse the freeholder of the costs through a service charge, management and/or maintenance charges.

If a landlord wishes to sell their block of flats, first they need to check to see if it is governed by the Acts

The starting point is the magical criteria of three:-

1. Does the building comprise 2 or more flats held on long leases?
2. Do the residential parts represent more than 50% of the overall area of the building and
3. Are at least 50% of the leaseholders Qualifying Tenants

If it’s “Yes” to all three questions then notices under the 1987 Landlord & Tenant Act (as amended by the 1996 Housing Act) may be required. As with most legislation it’s never quite as simple as answering yes to the three questions, as there are always exceptions to the rules.

But for the sake of simplicity, let’s assume the block falls within the legislation. The following is a rough guide to the procedure/process for selling by auction.

Section 5b Auction notices need to be issued (served) between 4-6 months of the intended date of the auction. It must contain certain information and be issued to at least 90% of the leaseholders (or all but 1 if less than 10). There is no price attached to the notice and there is no ‘buy now’ figure.

Once the s5b notices have been issued, the leaseholders then have a set period of time to respond (if they wish). To ‘accept’ the landlords offer, there must be at least 50% of the requisite majority who wish to do so and they need to serve three counter notices, 1) an acceptance notice (known as a s6), 2) a nomination notice and 3) a notice under s8B2 – all within their very strict time frames. If they fail to provide any one of the three notices then they may lose their rights under this legislation. The lot is still offered at auction.

If the leaseholders have not reserved their rights, then usually the Clive Emson auction particulars will say ‘the leaseholders have not reserved their rights under this legislation” and the successful auction bidder at or above any reserve is the buyer.

But if the Clive Emson auction particulars say ‘the leaseholders have reserved their rights’, the lot is still offered in the auction but the successful auction bidder only become the buyer if the leaseholders don’t exercise their right to ‘take over’ the contract (again there are strict time frames for this to happen) at the price it achieved in the auction. There is no negotiation. If the leaseholders exercise their right and ‘take over’ the contract they effectively take the place of the auction buyer and the auction buyer is refunded his deposit and admin fee.

And now for the three ifs!

If you are a leaseholder and you’re worried – just remember your lease provides the terms of your occupation.

If you’re looking to sell – we’d be pleased to help.

If you’re looking to start or continue to build your ground rent portfolio – keep a look out in our auctions as these lots are often included, but it goes, almost without saying, make sure you take independent advice before bidding. The Legal Pack (which is created and provided by the sellers solicitors) can be downloaded from our website once we’ve received it.

This is very much a whirl wind guide and as I’m sure you’ll appreciate there are various complications, exceptions to the rules and even freeholders and some leaseholders who are exempt from the legislation, however I hope this gives you a brief insight into them.

You can have a look through our current properties (including ground rents) here