Ground rents – modern v nominal

In June, the BBC reported the “immense distress” caused to leaseholders on one Swansea housing estate when they discovered that their ground rents were set to rise from £50 to up to £2,500 a year. Fully 250 properties were reportedly affected as a result of rent review clauses that provided for the ground rent to be reviewed every 25 years to an open-market rental value for the individual sites. Given that this is a rent review provision not commonly found in residential leases where the value of the lease is generally reflected in the premium payable for its grant rather than the rent, can that really be the meaning of the leases?   Modern ground rent The earliest reported decision concerning a “modern ground rent” in a long residential lease appears to be Cummings v Severn Trent Water Authority [1985] HBLR LVT 69, a decision of the West Midlands Rent Assessment Panel. In this, the lease was granted subject to a condition that “the yearly rent reserved thereby shall be altered in upward direction only to a figure to be assessed in accordance with current market values of the land at the time when the said land shall fall to be reassessed as if the land were at such review periods available for residential development for purposes authorised by the Town and Country Planning Acts…”. In valuing the freehold reversion, the tenant’s surveyor had adopted a “nominal ground rent” as the reviewed rent, whereas the landlord’s surveyor had adopted a “modern ground rent”. The panel decided in favour of the “modern ground rent”. However, in subsequent decisions tribunals have been less keen to do so. In Jarrett v Burford Estates & Property Co Ltd [1999] 1 EGLR 181 the lease provided for rent reviews to an annual rent “as shall be ascertained by reference to current open market ground rent levels”. Peter Clarke FRICS held that, on a true construction of the rent review provision, the reviewed rents were nominal ground rents. That is to say they were to be ascertained by reference to the level of rent customarily reserved when a house is let at a premium on a long lease. Jarrett was followed in Elmbirch Properties plc v Schaefer-Tsoropatzadis [2007] 2 EGLR 167, in which the rent review clauses stated that “such a revision to be made in the amount of the yearly rent… shall equal the increased market ground rental value at the time of the relevant review date”.   Nominal ground rent There were several factors in Elmbirch that led to the conclusion that “ground rental value” meant a nominal ground rent only: • the original leases provided for the payment of a “nominal” rent only; • a substantial premium – ie the capital value of the flats – had been paid on the grant of the leases and the tenant would not have expected to pay a “full” rental of the site value of the flat in question at and after the first review; • a contract for the acquisition of the leasehold for a substantial premium and on payment of a nominal ground rent was not an uncommon transaction in 1973; • the lease was clear that future rents fixed on review were not to be different in any respect from the initial rent, save in amount; • the rent review clause made no reference to any “assumptions” and “disregards” such as it being a cleared site, with or without services, and the length of the notional term, which would have been included had the parties intended a full ground rent; and • the case concerned two flats, the demises of which did not contain any letting of part of the site and which expressly excluded the soil and ground beneath. As flats they could not be developed in mid-air, in isolation from the block containing them and there would be issues as to the apportionment of the rent of the whole site. In Jarrett the tribunal also took into account that there was and had not been a market in full ground rents of residential property in Redditch and the rent review provision used the word “levels”, thereby recognising “that nominal ground rent comparables would be levels of rent prevailing at the rent review date and not individual rents representing the letting value of the site, which could be analysed and applied to the appeal property”.   The future view… There are two cases proceeding through the Upper Tribunal in which the issue is, again, whether the rent review clause provides for a “full” or “modern” ground rent, in both cases the Leasehold Valuation Tribunal having found that it does not. Plotnek v Govan was heard on 14 July, but the decision has not yet been handed down, and Clarise Properties Ltd v Rees was heard at the beginning of September. It is believed that the rent review clauses affecting the Swansea estate are similar to that in Plotnek, which differs from the clauses previously considered by the tribunal in several respects: • it indicates that the basis of payment is to change, saying the current rent “being a nominal rent notwithstanding”; • the words “ground rent/rental” and “levels” do not appear: the clause provides for a review to the “open market letting value” of the demised premises “as if it were a vacant site”; and • it includes certain “assumptions” and “disregards”: the site is assumed to be vacant, the notional term is 99 years, and the terms of the assumed letting are those set out in the lease, disregarding the term, rent and rent review provisions. Further, the demised premises are a house. Development is possible and there are no issues as to the apportionment of the rent. And the lease was entered into after the decisions in Jarrett and Elmbirch had been reported, arguably affecting the way the language of the review clause would have been understood by a reasonable man. Whether the above factors will sway the tribunal remains to be seen, but the cases serve as a warning to residential property conveyancers, many of whom seem to have missed a strikingly unusual form of rent review clause.   Ellodie Gibbons is a barrister at Tanfield Chambers