Ground Rents are created when a developer creates long leasehold titles to new apartments or houses, and retains the freehold interest. This provides an annual ground rent income to the owner, and is often kept as a retirement ‘nest egg’ . When drafting leases to the new leasehold interests, the developers solicitor rarely seeks to maximise the value of the residual ground rent interest.
A balance must be found between making the leasehold units attractive to purchasers, and maximising the investment value of the developers retained ground rents. In this article I will highlight desirable elements of ground rent leases, and give guidance on how one can sell ground rents.
The rent review pattern for a ground rent lease is key. Increases should be a frequent as possible to maximise the Net Present Value of the income increase for the owner. As such a 5 year review pattern is ideal. The mechanism for reviewing the rent should be as aggresive as possible, tracking the Retail Price Index is desirable. At the time of writing (June 2008) this is running at c4% p.a., a good return when combined with 6% initial income.
The right of the landlord to appoint managing agents is also desirable. This ensures their investment is effectively managed, and that ancillary insurance income can be assured. Additionally any disputes with lessees deter investors. The presence of a tenants management company is a moot point, one is very dependent upon the organisation of it to pay the ground rent annually. It can reduce administration costs however, as only one rental demand has to be send out.
When selling ground rents Section V notices have to be served on lessees, unless the properties are houses. Most ground rent investors will do this at no charge to the vendor.
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