Ground rent investments and auctions

For many years, Strettons have been selling freehold 'ground rent' investments by auction, where all or both of the units in purpose-built blocks, converted houses, or purpose-built pairs of maisonettes have been sold on long leases on ground rents.

The freeholders often have the right to insure and recover the premiums from the leaseholders and manage the building, which can add to their appeal. Over the last few years, we've seen increased demand for such properties.

As many of you will be aware, landlords are bound by the provisions of the Landlord and Tenant Act 1987 and the Housing Act 1996 before they sell.

These pieces of legislation make it a legal right for notices to be served on the leaseholders giving them the rights of first refusal or the opportunity to purchase their freeholds. In the case of auction transactions, there are specific section 5B notices which must be used and served between 4 to 6 months in advance of the auction.

The law has also evolved where it seems now that if a landlord wants to create a new lease of a ground floor commercial unit or create a new lease for rooftop development (where any residential parts are caught by the Acts) then notices need to be served.

As always, this is the simplified position. There are a number of time periods and criteria that must be adhered to, both by landlord and tenant, to comply with their legal obligations.

If the lessees do protect their rights and the freehold sells in the auction room, the lessees step into the buyer's shoes and take over the auction contract.

It would seem that once the auction notices are served, a sale should not be concluded prior to or post of the auction date, nor can they be under-written.

It is interesting to note that where the lessees have protected their rights, the auction sale price appears to be a little depressed. Indeed, many of our main buyers choose not to bid on these lots. Perhaps they should bid, as one might argue the higher the auction price, the less likely the lessees will take over the contract?

The market still seems quite strong for investments where the leases are getting shorter, particularly having less than 80 years unexpired. Of course, the freeholder is anticipating that the leaseholder will approach him for an extension to the lease. However, a recent Government press release on Leasehold Enfranchisement has suggested a future change (amongst many other things) on how premium calculations are undertaken which might then be in the leaseholder's favour.

Some recent examples from numerous freeholds sold in our auctions include:

So, something of a "maze", but provided you get the basics right at the outset and follow procedure, there should be few issues. Certainly, our experience is that ground rent sales by auction achieve a positive outcome and good prices. 

For further information, please contact the auctions team on 020 7637 4000 or email auctions@strettons.co.uk.

Ian Mann BSc MRICS is a Chartered Surveyor and Associate Director in the Auction team. Ian and several of his colleagues have wide-ranging experience in ground rent investment sales and will be able to assist with any questions you may have.