Ground Rent – real or racket ?

by Readers Question

17:50 PM, 6th July 2013
About 5 years ago

Ground Rent – real or racket ?

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Ground Rent – real or racket ?

I bought 3 properties off-plan in 2008, and was assured that rental demand would be high. However in this particular area (Dudley, West Midlands) rents have declined, and now the Ground Rent is around 25% of the rentals income.

The freeholder’s nominated management company have increased their fees, so that takes another 25%, and provide a poor service. By the time the mortgage gets paid, well I’m sure you see where I’m heading.

I know, I know, I should have questioned my solicitor more closely at the time, but as a newbie landlord, physically remote from the property …. mea culpa, but I had no idea what the ground rent should be.
My question – is the NO prescribed method to set the value of Ground Rents ?

In every other field (consumer, contracts etc.) the concepts of “reasonable” and “fair” are upheld in law. Does nothing apply in this area?

Regards

Peter ClarkGround Rent - real or racket



Comments

Mark Alexander

17:54 PM, 6th July 2013
About 5 years ago

Hi Peter

We have a few experts in the area reading our forum. I have invited them to comment.

Gary Nock

5:50 AM, 7th July 2013
About 5 years ago

Hi Peter. A ground rent of 25% of the monthly income sounds very high. I am assuming that we are talking apartments here? Ground rents on new build flats are generally £150 a year and service charges between £700-£1000 a year depending on managing agent. You can go down the Right To Manage route where you kick the managing agent out but its not for the faint hearted. I have done it on a number of developments but it can take a minimum of 9 months up to years if the Freeholders appeal through the Leasehold Valuation and Land Tribunals. And you need at least 50% of the leaseholders in the block or development to become members of the RTM

Rob

6:20 AM, 7th July 2013
About 5 years ago

Hi Peter, i have a portfolio of flats all bought new build over the last 11 years or so, the ground rent cost is always stated in the lease as well as details of when they can increase it and buy how much. My ground rents are all £250pa with 2 others being £300pa. Service charge will always be a rip off with the company dealing with it taking everyones money and not doing the work, You would need to get together with the other residents and look at the option of RTM like gary said, or explore the option of just sacking them and appointing someone else. As for the ground rents i would contact you solicitor who dealt with the purchases and get him to check the lease on the flats and see what it says regarding ground rent. Good Luck!

Ian Narbeth

15:39 PM, 8th July 2013
About 5 years ago

Dear Peter
I am afraid this is probably a case of caveat emptor. It is unlikely the seller will have made any actionable representation that you can sue on and if market rents have declined that is not the seller's fault.

Your ground rent sounds particularly high. Usually ground rents are no more than £300 to £400 pa. What are your ground rents and what occupational rents were you hoping for?

You also need to watch out if the ground rent doubles after 25 years (some double every 20 years). That will become a problem in the future as rents and inflation don't normally rise so rapidly.

Andrew Taylor

16:36 PM, 8th July 2013
About 5 years ago

We tend make ground rents 'enough' to encourage the sale of the freehold once the development is finished. Even, so we are still only talking £250 a year per flat in the SE.

Annette Stone

16:56 PM, 8th July 2013
About 5 years ago

Can I make a few points here

1. Not all managing agents charge crazy fees. Some of them charge fairly and reasonably for the job that they do which. If they know their stuff, can involve them in lots of things besides management. I guess I am now quite a senior member of the profession and in a normal week I might deal with two or three major woks projects involving Section 20 procedures, oversee any problems with tenants in buildings which we manage where problems are being dealt with by more junior members of staff, dealing with two or three enquiries from lessees wishing to extend their leases and also dealing with all sorts of issues for client freeholders including whether or not they should buy ground rent investments. There are numerous other things that our staff have to do, prepare service charges accounts, ensure that utility bills are on the lowest tariffs, deal with sometimes irate people with parking, noise and many other issues. If you do it properly, as Mark will confirm I do, it is not such an easy job.

As far as the ground rent issue itself is concerned this has become more complicated in recent years since legislation decreed that lessees had to be offered the first option of buying their freehold before it could be sold to an outsider. What happens now is that large freehold groups approach developers and part fund the development before it is constructed. A management company is formed and this is inevitably tied to the freeholder's managing agent which is either owned by the freeholder or tied in some other way which is a whole other discussion Thus when a person buys a lease there is already a management structure in place with a freeholder and the issue of offering the freehold to the lessees first does not arise.

It does not end there. It is invariably the freeholder who sets the ground rent and as he wants to recoup his investment and make a profit as quickly as possible ground rents of £300 doubling every TEN years are not that unusual nowadays and if you do not have a smart solicitor and you do not read the lease yourself this is what you can sign up to. 25 year doubling is very common.

To further explain, the ground rent is not the issue here. The freeholders would actively welcome you trying to buy yourself out of lease terms like this and getting a 90 year lease extension with no further ground rent because the price you would have to pay takes ALL of the ground rent into the calculations and the freeholders can make a fortune.

The final point I would make is that these leases usually have myriad clauses allowing the freeholder to charge for Licenses to Let etc

My advice to anyone buying a flat is insist on a copy of the proposed lease being provided for you to read thoroughly and when you have read it - read it again! Do not rely on your lawyer, the responsibility is yours and if you see these sort of ground clauses or other potential costs run for your life.

Mark Alexander

18:00 PM, 8th July 2013
About 5 years ago

Reply to the comment left by "Annette" at "08/07/2013 - 16:56":

Excellent advice Annette, you have no doubt seen the testimonial which I left on your member profile too 🙂

Gary Nock

19:40 PM, 8th July 2013
About 5 years ago

Reply to the comment left by "Annette" at "08/07/2013 - 16:56":

Hi Annette. Can I ask a question in relation to management companies. I am dealing with a case where there is a management company in place and the lease names it and states that the intention of the company is that each of the lessees becomes members. Now rather than going for RTM, can enough of the lessees join the management company and vote on enough Directors to kick out the existing management company and appoint a new one?

Annette Stone

22:58 PM, 8th July 2013
About 5 years ago

Gary. Thanks for your question. Without seeing the leases and having idea of who is involved advice can only ever be general and not specific. As far as I am concerned I do not like these management companies mainly because they rely on the apathy of most lessees who do not really want to get involved. In addition I would never want to be a director of a company where decisions may have been taken without my input for which I might, even in remote circumstances, become liable for in the future. I prefer right to manage companies where we help lessees to get the required number of people to agree to participate, a new company is formed, we make sure all the lessees who become directors have thre relevant insurances and we work with them all the way few. The other alternative is to consider buying the freehold and then running the builders with every lessee who participated in the purchase being a director and then electing a steering comittee to work with the managing agents but this is not always practicable. Hope this is helpful. If you let Mark know where your building is I will be able to let you know if I can help.

Gary Nock

7:58 AM, 10th July 2013
About 5 years ago

Annette thank you. It is more a general issue for me as I come across it on several occasions with my landlords who have flats. A registered management company in many of these cases is in place essentially controlled by the freeholders or the management services provider by having Directors in control of it. Now I have carried out a "management coup" in one of these where I managed to get a number of lessees as Directors and outvoted the family run management services provider and kicked them out. I did this as I have used RTM on many occasions against a very well known infamous Freeholder from Bognor Regis and they have bogged the lessees and myself down in protracted legal battles that have literally cost thousands. In fact two schemes are at Lands Tribunal in September having took two years and it has cost 6k to date. So what I am trying to ask in a clumsy sort of way is taking control of a RMC in the way described above a reasonable alternative to RTM where RTM can be
problematic? This is in my experience cases where there are multiple blocks where RTM law is clumsy and does not really cover such instances?

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