Buying Ground Rents and Freeholds

What it is: Now that there are many more flats and apartments being built than houses, leaseholds, once rare, are becoming ever more common. All apartments in blocks are sold leasehold as to have a freehold property means that you own the land on which the property is built; clearly this cannot happen with a third-floor apartment, for instance. All leasehold properties are owned by a freeholder; that is, somebody who owns the whole building, and who leases out the separate apartments to the leaseholders. But freeholds frequently change hands, for a variety of reasons.The initial freeholder or developer may have gone bust, they may have died, or they may have tired of the business of collecting ground rents, service charges and so on. It is possible to buy the ground rents off the freeholder and so own the building. This business is only going to grow as ever more apartment blocks are created.Pros: Ground rents and freeholds are often sold extremely cheaply. You see investments being advertised for as little as £4,500. But the collectable ground rents may only come to £300 a year. People who buy ground rents and freeholds usually view them as a very long-term investment, and as their business. It’s no use just buying one; you have to own a lot to make it work. The main reason why people buy ground rents is that when all the leasehold interests of a property run down, the buyer of these rentals now owns the freehold. In practice these days, leaseholders are likely to get together to collectively enfranchise – buy the freehold between them – and in order to do this, they have to negotiate with the person who owns the rental interest. The shorter the lease, the more the owner stands to gain from selling the freehold.The whole business is subject to extremely complex calculations and legal processes and either way, whoever owns the ground rents stands to gain – eventually. When you buy a property, you are buying this element only and not any other covenants that may affect the building. You are simply buying the covenant to pay this rent. First of all, you have to obtain an application pack from Land Registry containing forms GR1 and GR2, or they can be downloaded from the internet. Then you have by law to give the tenants in the building the right of first refusal before going ahead with the purchase. To make it worthwhile, you would need to buy ground rents of properties with leases of 80 years or less; the shorter the lease has to run, the more it becomes worthwhile to consider buying the ground rent element of the building.There are now many companies that buy up ground rents; this is a specialist area and one, really, which is not highly recommended for the amateur. The business of buying ground rents is best left to the seasoned property investor who has, maybe, started off by buying and selling their own home, graduated to buy-tolet, buying at auction, and gradually become more confident and experienced in the kind of property investments that ordinary people do not readily understand. Very often, companies or individuals buy up ground rents with the intention of increasing them once bought, as some properties are nominal and are charged on a never-increasing basis. Some properties can be as little as £25 or £50 a year.Also, nowadays people are buying up property to make money from enfranchisers – that is, the ever-increasing number of leaseholders who collectively buy their freehold. When enfranchising, leaseholders must compensate the ground rent holder for the total income stream he or she will lose and the present value of the ownership he or she would have secured when the leases expired. As you can see, buying rentals can be a very complicated business and those interested should take advice from a lawyer, or a company such as Rosetta Consulting, which specializes in real estate and enfranchisement law.