Over the course of the last few months ground rents have been thrust into the spotlight and appeared in headlines, newspapers and journals that are not property specific.

The issue has arisen following the practice of developers to incorporate geared and rising ground rents within leases that they have granted on their new-build properties but the implications have extended much further.

In lease extension work, the valuation of the ground rent is an integral part of the valuation process that contributes to the premium payable by the leaseholder.

We have come across simple staged rising ground rents, those geared to the retail price index, those geared to the open market value of the property and those that increase by a set multiple at set intervals.

At the beginning of the lease, these may seem fairly insignificant but with the likelihood of inflation rising over the course of the next few years with a rapid rise in house prices and the mathematical effects that gearing can have, there can be a dramatic effect on value. It should be borne in mind that this may well raise the ground rent but in the current climate, it may well reduce the capital value of the property somewhat setting off the overall figure. Accurate valuation and understanding are therefore essential.

The practice also exists where leaseholders enter into negotiations for a lease extension outside the Act and agree to the payment of ground rent in addition to the payment of a premium or to a slightly lesser payment. In these circumstances, leaseholders will often agree to such a provision in the knowledge that they are selling and will not suffer the implications but few know exactly what difference that ground rent should make. The calculation of ground and head rents is also Important in ascertaining the distribution of premium between a freeholder and head lessee and incorrect calculation of this can easily lead to the distribution of the premium payable.

Over the course of the 10 years that we have been dealing with lease extension work we have dealt with both freeholders and leaseholders advising them on each of these different aspects of the lease extension valuation. Traps exist for the unwary!

      

Approximately 3 years ago a fairly straightforward crack appeared in a building that we manage and investigation concluded it to be subsidence which required rectification.

Work was undertaken to stabilise the building and repair internal damage, both to the common parts and leaseholders’ individual flats.

The fly in the ointment turned out to be the presence of a railway line within 20 metres of the side wall of the block. There was a large crack in this wall and some disturbance of brickwork and misalignment and work on the exterior was essential to complete the project.

The problem was that the railway line in question was a main railway line on which freight runs to and from Europe on a 24 hour a day basis. The proximity of that block to the railway line meant that there were potential issues with electric arc-ing (it was an electrified line) and in addition, there were concerns about the loading of the scaffolding that we were to erect on the railway embankment.

We were drawn into a world of negotiation with Network Rail, the like of which we have never seen before where design after design of scaffolding was submitted and refused consent until ultimately, we were able to design a scaffolding that could hang from the roof. The issue of arc-ing and security was paramount and we had to confirm that there would be 24-hour security on the site to prevent trespass, exceptionally strict controls of personnel and an enclosure to the scaffolding to ensure that no debris, tools, etc. could fall.

Eventually it was decided that the railway would have to be shut but the immense disruption costing hundreds of millions of pounds that this entails that Network Rail will not usually shut the railway unless there is an emergency. They do however have a number of built in slots within which they can facilitate work.

What should have been a straightforward job over one week thus extended to six months of seven-hour possessions from midnight from midnight on Saturday to 7:00 in the morning. Much of this time is taken up in ensuring that the health and safety requirements to commence work and close work are completed.

It looks like the work will now be completed by the summer and the block will be, once more, without issue – all in the day of a managing agent.

 

Dec
11

Southend

One of our clients made an instruction to market a former restaurant to the south of the centre of Croydon. Because other previous restaurant options had failed, which led us to consider other uses.

Over the course of the last few years, legislation has provided a right for leaseholders to buy the block of their flats, subject to certain conditions.

When it comes to the possibility of future development this can prove particularly lucrative and as most blocks experience a certain level of non-participation there is also the investment aspect of the freehold purchase that can benefit those who are involved.

It must be borne in mind therefore that the valuation of the freehold is only one aspect of the valuation that needs to be considered in these circumstances.

In essence, a company is formed to buy the freehold and this is similar to any other company. It will have a shareholding and once the freehold is acquired it will have an asset of value.

The shares therefore have value and this will depend on how much development potential the block may have and how much investment value there is in the unextended leases of those who choose not to participate.

If equal shareholdings are to be distributed to those that participate, the amount they are to gain from any automatic lease extensions also needs to be separately calculated.

For example, any individual with a 10 year unexpired term on their lease will have much more to gain from an extension to 999 years than would an identical flat in the same block but with a lease of 125 years unexpired.

The majority acquisition of the freehold is effected simply to gain control of the block but expert advice on these other aspects is essential to ensure that matters are dealt with correctly and that no individual loses out.

A very successful day at the South East Property Expo, to which we would like to thank everyone.

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With the annual South East Property Expo fast approaching. HNF Property are pleased to announce that we have secured two large stands at the event. With one stand dedicated to company awareness offering information on the companies services. We have a second stand set up as an “Advice Centre” where our team of experts will be ready to give free advice and guidance on “Commercial & Residential Agency” “Property Management” “Lease Extensions & Valuation” and other property related matters.

The event is being held at The Hop Farm, Maidstone Road, Paddock Wood, TN12 6PY, and on behalf of all the team here we look forward to seeing you.