If a property owner owns the leasehold interest they own the building, for a defined period, but not the ground (the ‘ground’ part of Ground Rent, below) upon which it is built. Leasehold interest in this regard is distinct from private residential letting agreements. Ownership of the freehold interest gives free title, outright ownership of the building and land that lasts forever. Leaseholders do have the right to buy out the freehold (see below), but there is no strict requirement that they do so.
The rent payable by a leaseholder is referred to as Ground Rent. It is usually a small sum payable per annum, and is very different from market rent. It is quite common for people who hold property under a lease to neglect paying the ground rent, indeed oftentimes it is never demanded. Certain companies, however, have en masse acquired the interest of the lessors to demand the ground rent, and a letter of demand from such a company can sometimes be the first a leaseholder knows about the liability to pay. Arrears will often be demanded, however by operation of the Statute of Limitations, a Lessor cannot recover rent which is more than six years in arrears.
Why Buy Out the Ground Rent?
- There is considerable advantage in buying out the ground rent as the owner will then own the freehold, holding full title
- Ground rent will no longer be an issue. This could save time, inconvenience and expense.
- This is particularly so when the property is later being sold as purchasers generally find freehold properties a more attractive purchase.
- As the term expires it becomes considerably more expensive as each year passes to buy out the Ground Rent.
- Lending institutions won’t give loans on a leasehold property that has less than 70 years left to run.
Who Can Buy Out the Ground Rent?
Leaseholders have the right, regardless of the Lessor’s consent, to buy out the ground rent and mechanisms are in place to ensure they can do so. The ground rent is bought out either for an agreed sum of money, or where there is not agreement as to the sum, the Property Registration Authority use a specific formula derived from the sum of money that would have to be invested in long-term Government bonds to produce the same annual income.
Whether a Leaseholder buys out the ground rent is a decision for them to arrive at, with regard to the considerations which apply in the individual circumstances.
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