Lease extension cost - rising ground rent

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    #16
    sgclacy,

    A lower cap rate would increase the premium significantly! Surely this is the reason for the leasehold reform paper currently under review? A 5% cap rate would result in a premium of about 9k, a 3.5% cap rate would increase this to 15k!

    Is there precedent to set the rate lower on onerous ground rents?

    And is it better to see what reform is proposed before doing anything?

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      #17
      Section20z,

      Blimey 3.35% would increase the premium massively.

      No I would do a stat extension. But I haven't done anything as I'm waiting to see what reforms are proposed.

      Whats the best approach?

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        #18
        Just had a quick skim through the report. You're right, ground rents won't be abolished. But the government might set cap rates which avoids the need for the tribunal. I guess the issue is if anyone has onerous ground rents if cap rates are low then the premium will be so high it wont solve the problem. Consultation said between 3-10%. Lets hope they settle on 7-8%!

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          #19
          I think that that there will be a single curve for relativities for the whole of the UK except Prime Central London. There will be winners and losers but at least everyone will know where they are. Relativity will be lower than some would like, but the contribution payable to landlords professional fees is likely to be capped. I think the ground rent multiplier will be more favourable to lessees than present interest rates would suggest to be fair, in all its meanings other than in some misguided idea about social justice. I say misguided because social justice is the business of the tax system, not helping out this particular generation of leaseholders with a windfall of some sort.

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            #20
            You mean cap rates will be set? By lower do you mean sub 5%? Historically its been around 6-7% I think.Trying to get a feel for where it might end up.

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              #21
              No I don't mean "cap rates will be set". I mean that the relativity will come to be accepted to be lower than previously thought by some surveyors, in other words the value of the short lease accepted to be a lower value as compared with what the property would be worth if held virtually freehold. Here is a link to this leading Upper Tribunal decision dated 1st July 2020 which trumps First Tier decisions. This determination is the latest in a line of decisions which changes the tone of value of a lease extension when the lease is comparatively short and which will have the effect of boosting the premium payable to the reversioner.

              http://landschamber.decisions.tribun...w.aspx?id=1619

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                #22
                I don’t have a short lease - my lease has 115 years unexpired. So not sure how relevant that report is. I’ll have to do a stat extension at some point to buy out the ground rent. My issue is the capitalisation rate that will be applied l

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                  #23
                  The new law may let you buy out the ground rent but leave the leases as is. Personally I d like to see 4 % to buying out income rather than 5% or 6% because interest rates have come down so much, but it is anyone's guess what will be............

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                    #24
                    Originally posted by flyingfreehold View Post
                    The new law may let you buy out the ground rent but leave the leases as is. Personally I d like to see 4 % to buying out income rather than 5% or 6% because interest rates have come down so much, but it is anyone's guess what will be............
                    Aside from a couple of cases, enfranchisement cases and lease extension premiums centre around relativity, the value of the property and the deferment. As the leases are invariably some years old the ground rent granted in those days was invariably fixed and by today’s standards very modest. Therefore, there has been little discussion on capitalisation rates.

                    I am surprised that the matter of the collapse in the risk-free rate has not brought forward a challenge on deferment rates and capitalisation rates.

                    Sportelli in 2007 the risk-free rate was considered to be 2.25% and added to that was various risk premiums to get to 4.75% / 5%. At that time the Ogden rate (i.e. the long term risk free rate used in personal injury claims) stood at 2.5% . The Government actuarial department has lowered the long term risk-free rate to MINUS 0.7% and after lobbying from the insurance industry increased it to MINUS 0.25%.

                    Capitalisation rates whilst not the subject of Sportelli would be built up from a risk-free rate plus various risk premiums to get to the 5%- 6% currently used. The capitalisation rate has yet to fall in sympathy with the collapse in long term interest rates

                    A reduction of some 2%- 2.5% in both the deferment rates and capitalisation rates would wipe out almost all marriage value claims.

                    The discount rate used to value a redemption of a rent charge uses the National Loans Fund interest rate (available from the UK Debt Management Office) at a rate of around 0.6%. The rate on Consols is used in the valuation of very small intermediate leasehold interests. Consols, however have been redeemed in 2014. The current yield on very long dated gilts is around 0.6%

                    However, it would also undermine the Governments attempt to help lessees in acquiring the freehold or extending their leases.

                    Therefore, in negotiating the new way forward on valuation terms the Government may well need to tread very very carefully to avoid the whole valuation model exploding and giving the wrong result for lessees.

                    The government may be tempted to cap ground rents to help mitigate the explosion in the cost of a lease extension should capitalisation rates collapse but this would only strengthen the argument that adequte compensation needs to be paid and with large insurers holding large portfolios of ground rents it is inevitable there will be a significant legal challenge to any capping of ground rents or capitalisation rates in the range of 5% to 6%.

                    The only way the government can help lessees is to cap the landlords legal and valuation fees or make the landlord bear his own (especially if the interest was acquired post 1993)

                    Many will feel aggrieved at the increase in the costs resulting from a collapse in interest rates, however it was the collapse in interest rates that caused house prices to rise and the value of their final salary scheme to increase significantly

                    Perhaps the existing valuation model which has been refined over 25 years and to which has been in the wings and presumably reflected in the price purchasers have paid for leasehold purchases (particularly with short leases) and it may be fairer to all if that model is left intact. Certainly prescribed rates (except possibly at the very top end of PCL properties) and a valuation calculator would be helpful

                    Comment


                      #25
                      Originally posted by flyingfreehold View Post
                      The new law may let you buy out the ground rent but leave the leases as is. Personally I d like to see 4 % to buying out income rather than 5% or 6% because interest rates have come down so much, but it is anyone's guess what will be............
                      Not really sure how this would help. I have c110 years remaining on the lease, but I could just go for a statutory lease extension. The cost of adding 90 years to my lease would mainly relate to buying out the ground rent, as the value of my flat with 110 years unexpired or 200 years would be the same. Am I missing anything?

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                        #26
                        Originally posted by ecfc29 View Post

                        Not really sure how this would help. I have c110 years remaining on the lease, but I could just go for a statutory lease extension. The cost of adding 90 years to my lease would mainly relate to buying out the ground rent, as the value of my flat with 110 years unexpired or 200 years would be the same. Am I missing anything?
                        No you are not, as you say it is buying out the rent and on top of that paying around 0.5% of what the flat is worth

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