What is a Leasehold system?

This is the process where home buyers (leaseholders) are given ownership of a property for a specified period of time. At the end of its expiration, it is returned to the landlords or freeholders if not renewed. This type of property system have been in existence for more than a 100 decades in England and Wales. Australia and New Zealand have completely abolished theirs.

The system allows the freeholder (original owner of the property) to collect an agreed amount and give permission of occupancy. This permission of lease usually spans a minimum of 20 years to a maximum of 999 years. Aside the fixed premium amount paid as lease, the leaseholder is also obligated by law to pay a ground rent for an extended period of time. Failure to meet up with these obligation after a minimum of 3years can lead to forfeiture of the property.

Is Ground Rent Considered a Good Investment to Investors?

Meaning of Ground Rent:

Ground rent is an agreed amount paid by the leaseholder (usually the owner of the building or property) to the freeholder (the owners of the land where the property is built) to continue to permit its existence according to the lease agreement. These include a number of other payments like building planning permit or renovation permit for an existing structure.

Investors Takeover on Ground Rent:

In the past, the amount paid as ground rent was as low as £1 per annum. The leaseholders pay these amount without blinking as it was considered a fair deal. On the other hand, freeholders either collect or refuse to collect the annual payment since the amount is usually inconsequential. In recent times, developers or investors discovered they can introduce other charges by including clauses to lease contract. These hidden charges have increased the ground rent on new buildings to as much £200 to £400 annually. While this is a good deal for property investors, it has raised a lot of controversies leading to a leasehold scandal in England and its environs.

The leasehold scandal revealed the huge profit made by developers who, after developing, sell these properties for as much as £10,000 to investment companies.