Acquiring the ground ends ground rent worry


April 20, 2003

Readers continue to ask about ground rents.

Joseph Martin of Baltimore owns a property subject to a ground rent. He received a letter from a lawyer, offering to sell the ground for a price Martin thought was too high. Martin wants to know how much his ground rent should be each year and how much he should pay if he chooses to buy it.

And Rick Greezicki in Baltimore asks "whether a purchaser of real estate has the unconditional right to purchase any ground rent at the time of transfer?" He also wants to know how Baltimore and Baltimore County record ground rents.

Dear readers:

A ground rent that is contained in the lease of a single-family structure for more than 15 years may be redeemed by the leasehold tenant after a notice of one month to the landlord.

The right to purchase the ground when you buy the leasehold, therefore, is not unconditional. The ground rent owner can insist on 30 days' prior notice. For ground rents created between April 5, 1888, and July 1, 1982, the redemption price is equal to 16.66 times the annual rent. This equates to a capitalization rate of 6 percent. For example, if the annual ground rent is $90, the redemption price is $1,500.

A ground rent is created by recording a lease among the land records of the jurisdiction where the property is located. The lease specifies the name of the ground rent owner. When a ground rent is sold or transferred, a deed conveying the ground to the new owner is recorded in the land records.

Ownership of the ground is traced through the recorded deeds. The "chain of title" of ground ownership is different than the title chain of the leasehold property. Consequently, title of the ground and the leasehold property must be searched separately and reviewed to determine the owners of each interest. The original lease states the annual ground rent.

The annual rent also should be stated in each assignment (deed) conveying the leasehold interest. Martin's property deed should spell out the amount of the annual ground rent to be paid and the dates on which payment is due.

Ground rents customarily are payable in semiannual installments.

As in Martin's case, the owner of a ground rent sometimes contacts the leasehold owner and offers to sell the ground. The offering price may be discounted from the redemption price, but should not be higher. For instance, a ground rent redeemable for $1,500 may be offered for sale at a lower price.

How much should Martin pay for his ground rent? This is a matter for negotiation between Martin and the ground rent owner. If the owner will accept a purchase price based on a 9 percent capitalization rate, the price would be determined by dividing the annual rent by 0.9. The higher the capitalization rate, the lower the price.

Once the leasehold owner acquires the ground, he owns fee simple title to the property. The ground rent is extinguished and no further ground rent payments are made.

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