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Concept
Ground rent
Summary
As a legal term, ground rent specifically refers to regular payments made by a holder of a leasehold property to the freeholder or a superior leaseholder, as required under a lease. In this sense, a ground rent is created when a freehold piece of land is sold on a long lease or leases. The ground rent provides an income for the landowner. In economics, ground rent is a form of economic rent meaning all value accruing to titleholders as a result of the exclusive ownership of title privilege to location.
In Roman law, ground rent (solarium) was an annual rent payable by the lessee of a superficies (a piece of land), or perpetual lease of building land.
In early Norman England, tenants could lease their title to land so that the land-owning lords did not have any power over the sub-tenant to collect taxes. In 1290 King Edward I passed the Statute of Quia Emptores that prevented tenants from leasing their lands to others through subinfeudation. This created a system of substitution, where the tenant's full interest would be transferred to the purchaser or donee, who would pay a rentcharge. This system later passed into common law in England and was adopted by many nations which trace their legal heritage to England.
Classical economists and Georgists quantify ground rent to investigate and capture unearned income called economic rent, as distinct from income derived from labour.
The value of the freehold interest comprises:
A multiple of the current annual ground rent payable, which will depend on
the outstanding term of the lease
any future scheduled increases in the level of ground rent
market interest rates
the probability of default
if the rents for individual flats etc. are small, the cost of collection
The net present value of the reversion, i.e. at the end of the lease the freeholder (to whom the rent is paid) will probably be fully entitled to the property, so the shorter the lease the greater the reversion value.
Any attributable "marriage value" (a substantial sum designed to compensate freeholders for their loss of interest when a lease with less than 80 years to run is extended).
Official source
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