UK residential or commercial property law is amongst the most intricate in the world.
Amongst its many instruments is the ground lease.
Ground leases are approved by the freeholder of land and buildings to a leaseholder, generally with a long lease.
This is a semi-permanent plan as the lease usually lasts for 125 years or longer and will generally stay in location up until the leaseholder decides to terminate the lease, sell up and vacate.
If the lease runs out, then the land and structure( s) are transferred back to the freeholder, unless an extension is granted.
The leaseholder will pay both an in advance payment to the freeholder and ground rent, which is typically paid regular monthly or yearly.
The leaseholder usually holds absolute control of the residential or commercial property within restricted covenants and easements specified in the lease agreement.
Ground lease is charged applied to the land itself, which stays under freehold ownership throughout the long lease.
Essentially then, commercial residential or commercial property ownership through leasehold includes both an upfront payment in-line with the residential or commercial property's market price in combination with yearly or month-to-month ground rent.
A Quick History of Ground Leases
Ground leases are an olden feature of UK residential or commercial property and land law and though they have actually gone through several reforms in the Landlord and Tenant Act 1954 and Housing and Urban Development Act 1993, they remain essentially comparable to their middle ages origins.
Ground leases happened when much of the UK was owned by 'Landed Estates'. Feudal land barons, knights, earls, viscounts and other members of the British upper class owned the large bulk - or all - of the land. The Crown Estate, City of London, Church Commissioners and other significant institutions, for instance, still own considerable parts of London including Regent Street and substantial parts of the financial district. These areas will all undergo ground leases.
But, any freeholder of land or residential or commercial property can enter into a leasehold relationship with occupants and this is an extremely typical type of residential or commercial property ownership.
Ground leasing allows the freeholder to permit advancement and utilize on their land without moving ownership of the land completely.
There is considerable leverage in industrial ground leasing financial investment, where freehold land is acquired and sold on a leasehold basis with payable ground rent, and the present market is burgeoning.
There are 3 kinds of generic residential or commercial property ownership and occupation in the UK; freehold, longer-term leasehold agreements or shorter-term rental arrangements.
A ground lease is a long lease approved to a leaseholder. They are normally 125 years or longer in commercial residential or commercial property but longer in property.
The ground lease is given by whoever owns the land a building or structures are placed upon, i.e. the freeholder.
The lease is granted on the buildings and land - it offers the right for the leaseholder to use and manage the structure and charge lease on any occupiers, etc.
The leaseholder will typically pay an upfront payment for the ground lease, just like a regular residential or commercial property sale but at a discount rate (as they are not purchasing the freehold) and will have to pay ground lease to the freeholder likewise.
The benefit for the leaseholder is that they'll be able to access a commercially practical property that is often completely equipped, a 'turn-key' financial investment that they can instantly handle and earn a profit on.
Because they are only purchasing a long lease, the in advance payment is substantially less than if they were to purchase the freehold of the residential or commercial property.
Also, a lot of freehold land simply isn't for sale, i.e. in cities like London, the land may be owned by the Crown Estate. Leasehold is frequently the only option for running a business out of these areas and freehold buildings can be astronomically priced - not viable for the majority of services that prefer a more momentary relationship.
What is Ground Rent?
Ground lease is credited the leaseholder, by the freeholder, on the land that their leasehold residential or commercial property is built on.
In the UK, industrial ground lease will generally range between 5 and 10 percent of the earnings generated from the land and buildings for the leaseholder. The rent can be evaluated occasionally, normally every 5 to 21 years. Increasing the lease in-line with CPI and RPI would be affordable when the local market leasing costs are increasing.
If local market rental costs reduce then the lease will generally stay the same.
The Rights of Commercial Tenants
Business renters that are leaseholding industrial residential or commercial properties are given various rights through the Landlord and Tenant Act 1954.
These rights are referred to as 'security of tenure'. The headline right here is the right to restore the lease when it expires. Leases are generally very long, though, so this scenario is relatively rare.
It'll initially be down to the freeholder and renter to settle on the regards to the lease extension. But, if this fails then the court can moderate the process and make sure that a new lease is approved on fair terms.
In reality, numerous freehold: leasehold relationships are reasonably temporary and ownership can alter regularly, especially in commercial settings. Obviously, some are long-lasting relationships, e.g. some family companies have actually been operating out of Regent Street and other Crown Estate-owned land for hundreds of years.
When The Act Does Not Apply
Some leaseholds are not covered by the act and the tenants won't have the right to rent extension. These are as follows:
- Farming and farming services
- Mining
- When a licence is given rather than a lease (e.g. franchising).
- Short leases (normally under 6 months).
- When the renters choose out of the Act in composing.
- Subletting leaseholders that do not occupy the facilities.
- Where enfranchisement uses under the Leasehold Reform Act 1967
The law relating to business lease arrangements is advanced and lawyer or legal representative settlement is inevitable in the occasion of conflicts.
In general, less government protection is offered for industrial residential or commercial property handle general, including ground leases. Deals are accountable to caveat emptor - let the purchaser beware - oftentimes. Obviously, industrial leaseholders and renters still have rights, but the discretion and due diligence is strongly motivated for anyone considering leasing or freeholding commercial residential or commercial property.
Enfranchisement In Commercial Residential Or Commercial Property
The Leasehold Reform Act 1967 offered a foundation for domestic leaseholders to choose to purchase the freehold that their home is built on, or a portion of the freehold, instead of extend their lease or have to move out when their lease expires.
The intention here was to make it possible for the leaseholders in residential or commercial properties approaching completion of their long lease to buy that residential or commercial property as freehold instead of merely renewing the lease at substantial expense. This would unlock long-lasting homeowners in leasehold residential or commercial properties from ground lease, limited covenants and other guidelines set by the freeholder.
For houses, this is a fairly simple process. In flats, leaseholders can club together and purchase a portion of the freehold.
Again, this gives up leasehold owners from ground lease and other charges, and implies they have increased rights over the adjustment and maintenance of their residential or commercial properties.
But what about in industrial genuine estate?
This question was disputed in your house of Lords back in 2001. In the Act, the premises that occupants have a right to enfranchise are defined particularly as a 'house' or 'home'. The law is intended to protect homeownership, not industrial residential or commercial property ownership.
Two law cases Hosebay and Lexgorge argued that an industrial leasehold residential or commercial property should, in some circumstances, fall under the definition of 'house', therefore entitling the leaseholder to enfranchisement.
In both cases, the buildings in question were being used for commercial functions however had actually originally been created as domestic homes. After a prolonged series of appeals, enfranchisement was initially given to the leaseholders - they would be allowed to force the freeholder to sell them the land.
" I reach my conclusion without any specific interest. The 1967 Act was initially meant to assist domestic renters inhabiting their houses as their only or primary home to acquire their freeholds." And once again "I rather question that the amendments made to s. 1 in 2002 ... were intended by the legislature to have this sort of impact" - Lord Neuberger (Judge)
These cases were appealed all the method to the Supreme Court, who reversed the appeal for enfranchisement, thus denying the leaseholders right to enfranchise the buildings in question and forcing a sale from the freeholder.
The Supreme Court questioned these lines in the Act; "developed or adjusted for living in" judgment that the structures in the event were not a "house reasonably so-called".
It deserves keeping in mind that the residential or commercial properties in concern truly blurred the lines between 'house' and 'industrial residential or commercial property'. Commercial residential or commercial properties that are blatantly business residential or commercial properties, e.g. storage facilities or office blocks, would never be contestable in this way.
The relative resistance of business realty to enfranchisement further increases its utilize as a financial investment and is one aspect that has actually increased their appeal for those trying to find long-income financial investments.
Essentially, this makes sure that ground leases are a no-lose investment method for those searching for a steady 5% to 10% income from ground leas, with the added leverage of owning the land.
The freeholder is safeguarded from enfranchisement and the burden of liability is on the leaseholder to ensure they pay ground rent to avoid the structure from going back to the freeholder at most likely massive capital gain.
Ground Leases as Investment Opportunities
Commercial ground leas have drawn in considerable attention recently due to their bond-like qualities, take advantage of and security.
We can see how owning a residential or commercial property freehold, offering the ground lease and all at once collecting ground lease has potential as a high-leverage possession.
The freeholder will retain the land after the lease ends and since enfranchisement does not apply, the leaseholder will need to extend the lease if they wish to remain in the residential or commercial property.
It's a slow-and-steady financial investment route, not an alpha-investment route that can offer enormous gains, however for specific niche acquirers of land where ground lease can be charged on long-leases, they provide a solid opportunity to safe, long-term returns.
What is a Ground Lease Investment?
A basic ground lease investment is fairly basic.
It includes a relationship between an investor, who owns the land and any structures on it - the freeholder, and a leaseholder, who owns a long lease on the residential or commercial property just.
Long Leaseholder
- Owns the structure itself up until the long lease ends (typically 125 years+).
- Pays ground lease to the freeholder.
- May receive lease from commercial occupiers (or profits from other building classes like shopping centres).
- Is accountable for residential or commercial property management and maintenance
Freeholder (financier)
- Owns the land the structure is constructed on outright.
- Receives ground lease from leaseholder.
- Gets the building back at the end of the lease (if no extension is asked for or approved)
The ground lease will typically range in between 5 and 10% of the total earnings made from land and structures. The leaseholder is contractually required to pay this and if they stop working to do so, the freeholder can require the leaseholder to forfeit the lease whilst leaving any occupiers untouched, so would then receive 100% of any income produced from the land and buildings.
This adds security to the financial investment, as the leaseholder defaulting on ground rent payments would lead to a substantial capital gain as the residential or commercial property reverses back to them. Naturally, this would be rare, however long-lasting payment of the 5 to 10% ground rent is for that reason highly safe and secure and likewise protected against falling rental values, as the ground lease is only increased and never lowered.
In London, between 2007 and 2009, rental values for industrial structures dropped extremely - by as much as a third. Ground lease, nevertheless, would not be impacted, and the previously mentioned danger hostility of the leaseholder includes security that ground rent payments will continue to roll in, even regardless of unstable market forces.
For these factors, ground rent financial investments with their stable incomes of some 5 to 10% have become a fascinating financial investment choice for those looking for long-income, including pension and insurer.
Summary
Ground leases in the UK are approved by the freeholder of land and any residential or commercial properties built on it and the leaseholder, who will generally pay an in advance payment to own that residential or commercial property on a long lease as well as ground lease.
Leasehold ownership is useful for both parties. The landowner keeps the land after the lease expires, and can charge ground lease. This makes ground lease financial investment an appealing proposition as a long-income investment technique.
