Danger of escalating nominal ground rent on long leases

The Problem
These days many people buy ’virtual freehold’ 999 year leases. The ground rents are often very nominal and nobody cares too much if they double every 25 or 30 years.

The Law
The Stamp Duty Office will assess the stamp duty based on the average ascertainable rent over the whole period of the lease. Get your calculator out and start with a nominal rent of £25 per year doubling every 33 years. During the first 99 years the rent will not exceed £100 so nobody minds. Your calculator will however tell you that half way through the lease the rent is nearly £1 million per year. Three quarters of the way through the term of the lease the yearly rent exceeds £5 million and during the last few years, (give or take a couple of hundred million pounds), the rent payable every year is £16 billion. The effect of this is that the stamp duty payable would exceed the value of the property many hundreds of times so beware of long leases and automatic increases in so called nominal ground rents.

The Solution
Make sure that the ground rent is at an agreed level even if it is payable hundreds of years into the lease term.