What is Ground Rent?

In real estate, ground rent is a term applied when a person owns a structure itself, but pays for the use of the ground the structure is on. Its most common use is in the United Kingdom, and in the countries that were once considered part of the British commonwealth. The term applies to land that is typically leased in intervals of 99 years. In the United States, the term may sometimes be used interchangeably with lot rent, on things such as mobile home plots.

The ground rent system has some terms that are unique to the situation. A freeholder is an individual who owns the title to the land. A leasehold owner is a person who owns the building, but must pay rent for the land.

The concept of ground rent got its start in England during the time of the feudal system, which dates back to the Medieval period. While making an expensive improvement on land owned by someone else may seem like a risky endeavor, renewing the lease under the same terms at the end of the 99-year period is usually up to the leasehold owner. That individual may also have the option of purchasing the land.

The most common use of the ground rent system today is in urbanized areas. There, owners may wish to hold onto the lands they own simply because the potential for income is there. Rather than sell or try to improve the land themselves, this offers another option. Hotels and office buildings are two common types of structures built under ground rent situations.

In the United States, Maryland is one of the few locations where a true ground rent system is in use. There, some individuals may own homes, but not own the earth on which the home sits. This was a system put in place in the 1700s as a way of making it more affordable for some to own a home and improve the land. Maryland law does allow a leasehold owner to buy out the ground rent, if the deal was created after April 8, 1884.

In some cases, ground rent could be a term some used to refer to lot rent at mobile home parks. The terms are not completely interchangeable because there is usually no permanent structure on the land in question. Also, the parties generally agree to a lease annually, and the lease terms can be changed by the owner of the land.