GroundRents:About half of the applications to buy out ground rent have to go through an arbitration process, but it is not always a straightforward affair, writes Gabrielle Monaghan.

You've spent months planning that extension into the back garden and even picked out furniture for it, only to discover that a centuries-old practice means you don't even own the land your house is built on.

In the 18th and 19th centuries, English landlords entered into leases with tenants who were under an obligation to build on the land.

This enabled landlords to create income from the land and allowed the builder to either lease or sell the house.

Two types of property ownership still exist in modern-day Ireland. One is a leasehold, which gives the holder ownership of the building but not the land it stands on.

Ownership on a leasehold is fixed at a number of years. Therefore, an owner of a leasehold property owes ground rent to a landlord. A freehold interest, however, entitles its holder to both the land and any buildings on it.

"The landlord created a lease and charged a small rent but it wasn't subject to inflation," says Brigid McCaffrey, ground rents arbitrator for the Land Registry. "It was a nice sum of money at the time but is usually worth nothing now."

One of the most famous examples of this is the St James's Gate brewery, which was originally leased by Arthur Guinness for £45 a year in the mid-18th century in a 9,000-year agreement. That may have been a substantial sum of money at the time, but it wouldn't be a good deal now for Europe's biggest brewery.

Indeed, most landlords do not even bother collecting ground rent because the amount is so small.

The ground rent for leasehold properties tends to be about €100 per year, with a typical term of between 500 years and 900 years. The Landlord and Tenant (Ground Rents) Act 1978 abolished the right of landlords to create leases for residential dwellings and reserve ground rent. However, a large number of ground rents continue to exist in Ireland.

The Land Registry, which operates the Ground Rents Purchase Scheme, has received some 82,000 applications from leasehold owners since the 1978 Act came into force, according to McCaffrey.

The Land Registry still receives about 1,600 applications to buy out ground rents every year.

"The main reason they buy out the ground rent is the conveyance on the lease - they may want to develop their garden or there may be less than 70 years left to run on the lease," says McCaffrey.

Lending institutions will not give a mortgage on a leasehold property which has 70 years or less left to run. This is because the title effectively reverts back to the landlord.

"Some people might decide to sell and go to their solicitor and find out there is conveyance there and they need the landlord's consent, so they set out to buy out the ground rent," McCaffrey says.

If a person is buying or selling a property, any ground rent due will be recorded on the previous deeds, if the property is registered with the Registry of Deeds, or on the folio, if it is registered with the Land Registry.

However, this process is not always straightforward. The landlord may have died or cannot be tracked down and the homeowner cannot buy out the ground rent privately. About half of the applications to buy out ground rent have to go through an arbitration process, McCaffrey says.

"More people are going to arbitration because it's hard to find out who is entitled to the freehold interest," she explains.

The amount of ground rent is set by the arbitrator if a homeowner is buying out the ground rent under the Ground Rents Purchase Scheme and cannot agree with the landlord on the amount of ground rent to be paid.

The Land Registry will do all the legal work for a fee of between €30 and €195, depending on whether there is an agreement on the sum to be paid or if the Land Registry arbitrator has to fix the price. It is more expensive if an arbitrator is involved.

If more than 15 years remain on the lease, or the tenancy is yearly, the cost of buying out the ground rent cannot exceed an amount which, if invested in the most recent long-term Government Stock, would produce an annual gross interest equal to the amount of the rent under the lease or tenancy.

This amount is calculated by dividing the price of the Government stock, as quoted on the stock exchange at the previous evening's close, by the interest rate on the stock and multiplying the rent by the resulting figure.

However, if the lease has run its full term, the cost is based on the value of the property - typically one-eighth of the value of the house.

A vesting certificate will be issued if the leasehold owner buys the ground rent from a private landlord. This document has the same legal effect as a conveyance and "vests" the outright ownership of the property to the homeowner's name. If the landlord was a local authority, which is often the case in Dublin, the document is called a transfer order.

Legal experts advise registering the vesting certificate so that there will be a permanent record of a person's freehold interest in a property should the document itself be mislaid or destroyed.