Ground rent, sometimes known as a rentcharge, is a regular payment required under a lease from the owner of leasehold property, payable to the freeholder. A ground rent is created when a freehold piece of land or a building is sold on a long lease.[1] The creation of a ground rent on land provided an income to the landowner, while the builder would lease the land to build the house and then sell it on completion. A building can be either sold as a single house or divided as flats.[2]
Ground rent should not be confused with Chief Rent (confusingly also known as a rentcharge) payable on some freehold property in North West England,[1]
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In Roman law, ground rent (solarium) was an annual rent payable by the lessee of a superficies (a piece of land), or perpetual lease of building land. In early Norman England, tenants were able to lease their title to land such that the land-owning lords did not have any power over the sub-tenant to collect taxes. In 1290 King Edward I passed the Statute of Quia Emptores that prevented tenants from leasing their lands to others through subinfeudation. This created a system of substitution, where the tenant's full interest would be transferred to the purchaser or donee, who would pay a rentcharge.[1] This system later passed into common law in England and was adopted by many nations which trace their legal heritage to Britain.
The value of the freehold interest comprises:
In the United Kingdom, the rights of residential tenants' owning property subject to a long lease at a ground rent are governed by the Leasehold Reform Act 1967 for houses and the Leasehold Reform, Housing and Urban Development Act 1993 for flats.
In English law, it appears that the term "ground rent" was at one time popularly used for the houses and lands out of which ground rents issue, as well as for the rents themselves.[3] Lord Eldon observed in 1815 that the context in which the term occurred may materially vary its meaning.[4]
The contemporary accepted meaning of ground rent is the rent at which land is let for the purpose of improvement by building; i.e. a rent charged in respect of the land only, and not in respect of, the buildings to be placed thereon. It is therefore usually lower than the rent that might be achieved for a building let on the open market, and is for a far longer term of years (at least 21 years, but more commonly 99 years or 125 years, or even 999 years). However, inflation has eroded the value of most ground rents with long leases and non-rising incomes, so the value is now marginal where there is no prospect of a reversion (when the ownership of the property reverts back to the freeholder) within 150 years.
The Commonhold and Leasehold Reform Act 2002 and the "The Landlord and Tenant (Notice of Rent) (England) Regulations 2004" now govern the form of notice that needs to be issued to collect ground rent. Previously there had been a problem with some landlords sending confusing or dishonest demands for payments to tenants.
The final sanction available to a landlord faced with a leaseholder in breach of his lease due to the failure to pay the service charges, ground rent or administration charges, is to forfeit the lease and to repossess the house or flat. To do this the landlord must first serve a valid notice under section 146 of the Law of Property Act 1925, the Notice of Seeking Possession. However, The landlord cannot serve a section 146 notice where the amount of service charges, administration charges or ground rent owed (or a combination of all of these) total less than £350, or have been outstanding for less than three years.[5]
Under the provisions of The Rentcharges Act 1977, Lessees can free themselves of any annual rentcharge created before 22 August 1977, by applying to make a lump sum payment through the Department for Communities and Local Government (DCLG)following the closure of the Government Office for the North West in April 2011. Although many rent owners will try to make a private settlement with the rent payer,[6] the Act provides a formula which enables DCLG to calculate the redemption figure that the rent payer has to pay the rent owner in order to redeem their rentcharge. When the transaction has been completed DCLG, on behalf of the Secretary of State, issues a redemption certificate to the rent payer. Such rentcharges still in existence by 2037 will be extinguished.[1]
Under the terms of a lease agreement, the freeholder (the outright owner of the land or property) grants permission for a leaseholder to take ownership of the property for a pre-defined period of time. This could range from 21 years to 999 years and during this time the leaseholder will pay ground rent to the freeholder. Freeholders lease property for the purpose of collecting ground rent for long term investment. [7]
In Scots law, the term ground rent is not employed, but its place is taken, for practical purposes, by the ground-annual, which bears a double meaning:
There are a number of companies which specialise in buying ground rents for long term investment from landlords who want to sell their ground rents. Normally they focus on purchasing reversionary ground rents, either for initial income or for the opportunity of a reversion of the underlying property at some point in the future. The value of ground rents is affected by the rent review pattern on future income increases, the value of the underlying property, the unexpired lease length and whether marriage value is applicable.[8][9]
Prior to selling ground rents it is a statuatory obligation incumbent on both parties to the transaction, that Section V notices are served on the long leaseholders. This gives them a two month period within which to respond. Upon expiry of the notices, a transaction can proceed at the price stated on the notice or higher (but not lower) for up to 12 months subsequently. The only way this can be avoided is for exchange of contracts on the ground rents sale of flats to have taken place prior to 50% of the flats being sold. This then allows completion upon sale of the last flats without the need for Section V notices.
In the Republic of Ireland ground rents have been a feature of urban life. While most tenancy reform legislation has been enacted for agricultural land (see Irish Land Acts), urban occupiers / tenants have been allowed to "buy out" their ground rents from landlords, and so effectively change a long lease into a freehold interest, most recently under Acts of 1978[10] and 2005.[11] Notably ground rents in Castlebar, County Mayo have been withheld following the controversial disappearance of Lord Lucan in 1974.[12]
The term ground rent in the English sense does not seem to be generally used in the United States, but is applied in many U.S. states to a kind of tenure, created by a grant in fee simple, the grantor reserving to himself and his heirs a certain rent, which is the interest of the money value of the land. These ground rents are real estate, and, in cases of intestacy, go to the heir. They are rent services and not rent charges, the statute Quia Emptores never having been in force in Pennsylvania, and are subject to all the incidents of such rents. The grantee of such a ground rent may mortgage, sell, or otherwise dispose of the grant as he pleases; and while the rent is paid the land cannot be sold or the value of the improvements lost. The person who owns the land can live on it or they can build a home that is sold to other people, while they charge the new owners ground rent, which means the new owners own the home, but not the land and the new home owners pay the land owner money for living on their land.
A ground rent being a freehold estate, created by deed and perpetual in duration, no presumption could, at common law, arise from lapse of time, that it had been released. But, by statute (Act of 27th of April 1855, s. 7), a presumption of release or extinguishment is created where no payment, claim or demand has been made for the rent, nor any declaration or acknowledgment of its existence made or given by the owner of the premises subject to it, for the period of 21 years. Ground rents were formerly irredeemable after a certain time. But the creation of irredeemable ground rents is now forbidden (Pennsylvania Act 7 Assembly, 22nd of April 1850).
Ground rents are also found in some portions of Maryland, primarily in the Baltimore area. These are typically leases subject to a monthly or annual rent payment. Under Maryland law, if the renter does not pay, the ground owner can go to court and have a lien placed against the house. An emergency bill was presented by Democratic Maryland Governor Martin O'Malley to completely ban new ground rents in Maryland in 2007; the bill was passed by the legislature, though it is being contested in court. Victor Posner began his career in Baltimore in the business of building house shells for Blacks on property retained under ground rents.
This article incorporates text from a publication now in the public domain: Chisholm, Hugh, ed (1911). Encyclopædia Britannica (11th ed.). Cambridge University Press.