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!

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.

Apart from the value of a property the development potential of it is one of the most contentious factors in assessing price for freeholding enfranchisement and, on occasion, lease extension.

This often involves a discussion about the value of the loft space and its development potential, something that can be determined by the physical factors such as access hatch, its position, size, the height of the eaves, planning consent, etc.

At a tribunal hearing recently we have also had to consider a discussion on whether or not the value of development potential of a loft space is greater for a flat with a longer lease than for a flat with a shorter lease.

In a separate case we have also had to consider the possibility that a loft space could add to the value of the flat itself despite having no development potential.

 Many such issues are discussed at tribunal and as with many things in property there are often complications when initially none appear to exist.