Real Estate Update: ‘Take Back Control’ – Buying out the Ground Rent

The Landlord and Tenant (Ground Rents) (Amendment) Act 2019 became operational on 17 January 2020. Confusion and uncertainty as to the scope of a ground rent tenant’s right to purchase their landlord’s interest arose from a Supreme Court ruling in 2012. The 2019 Act was passed to clarify the rights of ground rent tenants to purchase the freehold title of their properties

Buying out Ground Rent

While there is no formal definition of a “ground rent” it typically refers to a nominal rent (for example €20 per annum) payable by a tenant which holds property under a long lease. The right of ground rent tenants to acquire their landlord’s interest (usually the freehold) in their property (more commonly known as - “buying out the ground rent”) is a contentious issue. Buying out the ground rent is important for tenants. Lending institutions, for example, will not give loans on properties on which the leasehold has less than 70 years left to run. It can also remove restrictive covenants on the leasehold title.

Statutory reforms introduced by Government sought to strengthen the rights of tenants to buy out the ground rent. The Landlord and Tenant (Ground Rents) Act 1967 and the Landlord and Tenant (Ground Rents) (No. 2) Act 1978 enabled tenants to purchase the ground rent, subject to certain conditions.

Success to date?

There have been in excess of 80,000 ground rents purchased under the statutory scheme and the existence of the statutory scheme convinced many other freehold owners to voluntarily sell their freeholds to tenant owners. However, in 2012, the Supreme Court in Shirley & Others v A. O’Gorman & Co Ltd & Others (2012) delivered a judgment which created uncertainty and confusion as to the scope of the right to buy out the ground rent.

If this interpretation was followed, landlords would be allowed greater opportunity to avoid the compulsory sale of their freehold interest to tenants.

How to buy out the Ground Rent

Tenants who hold their property under long lease can always try to agree to acquire the freehold from the freehold owner consensually. The price agreed tends to be a relatively low price, similar to the price that would be set by the statutory scheme. In many cases this will not be possible either because the freehold owner is unknown or simply will not agree to sell.

To purchase the ground rent under the statutory scheme, tenants must satisfy all of the conditions of section 9 and one of the alternative conditions in section 10 of the 1978 Act. Generally speaking, where the tenant has constructed buildings and carried out works which have increased the value of the land they have the right to buy out the ground rent and thus acquire the landlord’s interest.

However, under section 9 of the 1978 Act, to obtain the right, tenant works to alter or reconstruct existing buildings must have resulted in the original building having lost its original identity.

So, if the original building was constructed by the landlord or its predecessors, a tenant would have difficulty in claiming an entitlement to buy out the ground rent even where the tenant, or its predecessor, has carried out substantial alterations or extensions to the building, unless these alterations resulted in the building losing its original identity.

The condition that often causes most concern to tenants trying to buy out the ground rent is section 10(2) of the 1978 Act. A tenant must prove that permanent buildings on the land were not erected by the landlord or its predecessor and there is a presumption that the buildings were not erected by the landlord or its predecessors. The landlord must rebut this presumption.

The Supreme Court, unhelpfully, determined in the Shirley Case that the definition of predecessors in title should be interpreted broadly to include works by all previous owners. This was deemed to include not only the landlord receiving the ground rent but also any earlier tenants of the property in cases in which the landlord had taken back possession of the property between tenancies. This gave landlords a trump card and an ability to easily rebut the presumption.

Changes introduced in the 2019 Amendment Act

The 2019 Act introduced various factors which the ground rents arbitrator can consider in determining whether or not the building has lost its original identity. Helpfully for ground rent tenants, the 2019 Act now provides that an arbitrator cannot decline to hold that buildings have lost their original identity simply because a part or parts of the original building(s) can still be identified. The 2019 Act also now provides that tenants under expired leases are not the landlord’s predecessors in title even if the landlord has re-taken possession of the property between tenancies.

Comment

The 2019 Act is a welcome piece of legislation for ground rent tenants, as it clarifies their rights to acquire the freehold title to their property from a landlord. In particular, the 2019 Act removes the uncertainty arising from the 2012 Supreme Court decision as regards the landlord’s predecessors in title (no longer includes former tenants of the property under expired leases), and the extent of works required such that a building has lost its original identity.

For more information on buying out Ground Rent, contact a member of our Real Estate team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.