Leasehold property and ground rent increases [Mar 2008]

Q       "We had started to look for an apartment, preferably in a well established apartment block, hopefully with some history.  We had been considering the Beaumont Quarter but after reading about the landowner suddenly sending the ground rent sky rocketing, we are a bit fearful of buying at the complex.  How can lessees protect themselves from sudden ground rent rises when they first buy?  Will there be more cases like this?"

A       This topic raises two specific questions.  To answer the question of whether there will be more cases like this, in short I believe that there will be.

This leads us directly onto the second issue about how a lessee, as a purchaser of a leasehold property, can protect themselves when they buy.  When purchasing apartments, buyers should be very conscious of the fact that buying a freehold unit title apartment has very different price and value fundamentals to buying a leasehold apartment.  In many of the cities around NZ there are apartment buildings built on leasehold land.  Beaumont Quarter, the Viaduct Harbour, Lambton Quay are examples of this type of real estate.  Also, it should be noted there is a fundamental difference between the type of lease for those types of pieces of land and the lease for perpetually renewable leases common to leasehold land such at the St Johns College Trust Board, Cornwall Park Trust Board, Dilworth Trust Board and land of similar nature.

Before a person buys an apartment on leasehold land they should ensure that they have both a lawyer and a valuer who understands the underlying leasehold and the valuation parameters and can advise them best on the purchase of the property.  Provided that they have the best possible advice, they can purchase the property knowing that they have factored into their purchase price any future rent increases that may occur.  Almost all leases of leasehold land of this nature have regular rent reviews based upon an agreed formula set out in the lease.  The lease rent terms should be analysed carefully by a lawyer.  A valuer should give advice on the possible consequences of the increase in value of the underlying land in any future rent reviews.  Often this is a very difficult task.  However in the interests of trying to reduce the risk, understand the consequences and buy at the best price knowing all the factors any purchasers should obtain such advice first.

With the right advice and at the right price buying an apartment on leasehold land will be acceptable whether it is Beaumont Quarter or anywhere else.  Buyers just need to know what the issues are and go into the purchase with their eyes wide open.

For more information contact Tim Jones at .(JavaScript must be enabled to view this email address)

The contents of this newsletter are of a general nature only. While the information is believed to be correct no responsibility is accepted for its accuracy. Readers are advised to establish the applicability of information in relation to specific circumstances and not to rely solely on the text of this newsletter.

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