Graeme Elvin Mackenzie Elvin

Once again, the perils of purchasing leasehold land have been exposed in the latest controversy over ground rental payments at the Scene Three apartments in Auckland.

The owners of these leasehold properties are facing prospective increases of 470 per cent in ground rent for their Scene Three apartments.

Some owners, previously paying $1400/unit annually for one-bedroom places, are now faced with $8000/unit bills payable to landowner Ngati Whatua o Orakei Maori Trust Board, which this year won a valuation arbitration on its Quay Park land, allowing it to charge much higher fees.

The principle when dealing with ground rent, is that the land is leased for long periods of time, this could be 33 years or 99 years or even perpetually renewable, and you are buying the rights under that lease, not the land itself.

The original tenant usually builds on the land paying a ground rental that is usually assessed on an unimproved land value.

Depending on the terms of lease, the ground rent will be reviewed regularly, often every five to seven years.

The rent may be a fixed percentage of the freehold land value, with each rent review re-assessing the land value and increasing the rent accordingly. The rent is often held by a ratchet clause, preventing it from being less that paid during the preceding review period.

Historically, these leasehold interests in land were created by local government or by nonprofit entities such as the St John's Trust Board and the Dilworth Trust, or by Maori Land Trusts.

The purpose of the ground leases was to reduce the entry cost to third parties in order to encourage development, while retaining an inflation adjusted return for the landowner.

For unsuspecting tenants, issues arise when a rent review comes in a downturn, after a long period of inflationary growth. Many of these leasehold properties (some in our local area included) were originally sold at a discounted ground rent with a view to locking in unsuspecting investors.

Assumptions were clearly made by purchasers that the low ground rent would continue indefinitely, however as with any lease, the terms are all set out in the lease document.

The moral of the story is that if you are purchasing and it is leasehold, you need to be careful.

Short term gain could lead to long term pain. Unless you are the landlord of course.