What happens when ground leases expire?

An active management issue that will become more and more prevalent in the coming years is the issue of ground leases, granted by local authorities in the 60s, for terms of 99 years or more.

Such investments are often held by landlords and then sub-let out to tenants to be retained as a traditional investment, but what happens when the ground lease heads towards its expiry date?

Fairhurst Estates managing director John Thornley explains what can be done to address for a more favourable outcome: “When an investment ground lease term residue drops below 30 years, the value is affected and funders may find it increasingly difficult to use it as adequate security against a loan.

“Once an investment ground lease expires, an investment landlord will only have the benefit of an occupational lease at a full market rent, and there may well be dilapidation consequences and a repairing covenant  to observe in the original ground lease.

“It is, therefore, prudent for long leaseholders to engage with their immediate landlords or freeholders at the earliest opportunity to try and re-gear their interest, either by buying the freehold or negotiating the re-grant of a further ground lease for an increased number of years. It is also a good opportunity to negotiate out or resolve any onerous or inflexible clauses in the lease that may also adversely affect value.”

By way of example, Fairhurst Estates recently re-geared a ground lease on a property in Chester where the original term had less than 23 years to run. A new ground lease was negotiated with the freeholder for a term of 125 years at a peppercorn rent, which provided the client with fundable security to keep their bank happy whilst also significantly uplifting the capital value of the investment. Investors should always consider any opportunity to buy-in a freehold or re-gear their lease on non-onerous terms to keep control of their holdings, maintain flexibility and increase value.