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Long leasehold property

Lenders and their advisors in corporate recovery or turnaround situations should not underestimate the potential difficulties experienced when disposing of long leasehold property interests.
 
We have advised insolvency practitioners on cases involving onerous ground leases with high annual ground rent liabilities, sometimes as much as £20,000 to £25,000 and with future, regular rent reviews still to come.
 
Rent liability, coupled with the overheads of business rates and insurance, will cause a purchaser to weigh up long leasehold over more attractive freehold opportunities.
 
All too often the existence of such a ground lease will not have been adequately reflected in the valuation(s) provided at the initial lending stage and a lender may well be over-exposed as a consequence of high rent liabilities or restrictive covenants affecting the use of the premises.
 
Freehold will always be preferable and we will always seek to establish at an early stage what the prospects are to either acquire the freehold reversion or re-gear the ground lease on more beneficial terms, usually to an annual peppercorn or nominal rent and sometimes on revised/less restrictive terms (user clause, rent review pattern and the like).
 
The stance of the landlord will be dependent on whether he is a private individual or in many cases a Local Authority.  Both will require their “pound of flesh” by way of premium payment for variation or re-grant. Experience has shown that such payment can be based on multipliers in excess of 20 times the annual ground rent (in excess of £500,000 based on £25,000 per annum).  Evidence is typically available through the larger auction houses where ground rent investments frequently change hands.
 
These negotiations are likely to be protracted and, in the case of local authorities, political and striking early can be the key in a disposal scenario.
 
Corporate services directors will gladly discuss any cases you may have involving the above as well other property related matters.
 
Mark Swiers BSc (Hons), FRICS, Executive Director, Corporate Services, Leeds
Tel 0113 369 6096
 
Neil Bestwick BSs (Hons), MRICS, Director, Corporate Services, Leeds
Tel 0113 369 6088
 
Ed Dry MRICS, Director, Corporate Services, Manchester
Tel 0161 615 7021
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