Doubling of Ground Rent on lease

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  • SandraHope
    replied
    Hi,

    we were recently advised by our solicitor at point of exchange, to pull out of the sale of a one bed flat due to finding out, very late, that it had a doubling rent which also went above the threshold ceiling.

    This can affect the saleability of the property in the future and it’s no good people saying “ it’s not a problem” it IS if solicitors are warning against them, as did our broker and even the mortgage provider said it could be an issue in the future.

    Leave a comment:


  • Flashback1966
    replied
    I think you are worrying too much. Your current ground rent is £150 and it will go up to £200.

    We are in a period of low inflation. However, we go through a period of high inflation, £400 might seem like peanuts.

    Some leases in the 1970s, have ground rents of £5 per year. As inflation has outstripped it.

    I prefer leases which are liked to RPI, which are fair to all.


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  • MickyV
    replied
    Having run the Present Values etc. I believe you can use a Standard Lease Calculator with a level Ground Rent of £220pa and that will give you a very good approximation. In this case £4,000 to £5,000 as above

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  • MickyV
    replied
    I feel that the numbers others have quoted here may be quite a bit too high.

    am the Freeholder of two blocks with similar ground rent arrangements, but with 125 years to go and a ground rent of £250 doubling every 25 years. The flats were sold for between £150k and £300k I did lots of calculations on that and came up with a "fair" price of about £8,000 (a bit less for the cheaper flats; a bit more for the more expensive ones). I offered the freehold for sale on roughly those terms and one lot of leaseholders has said they want to go ahead and the others not - which makes me think I have got it about right. The price to extend a lease and reduce Ground Rent to a peppercorn is almost identical to this.

    If we looked instead at a £100 ground rent as the start, doubling every 25 years, we would probably then be looking at a value of about £3,000 to £3,500 at the start of the 125 years. You are 11 years closer to the first increase (and there is a tiny effect from the shortening of the lease), which will add a bit: call it another £1,000.

    You need to add an additional £50 for the first 14 years to reflect that it your initial Ground Rent is actually £150 rather than £100: Call that £600 because of discounting.

    So I would say £5,000 should cover it. Call it £6,000 to be on the safe side. It is not too difficult to get a more accurate value if needed but I think that should work for now.

    There are a few mortgage lenders who do not like Ground Rents doubling. However, most will accept a doubling every 25 years because that works out almost identical to an inflation-linked review every 25 years.

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  • Bendis
    replied
    If the seller is desperate ask him for a discount. Then wait the two years and extend then. If you are keeping long term there is no rush, the price for the extension will not vary greatly until the lease does not drop below 80 years.

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  • Macromia
    replied
    Originally posted by AndrewDod View Post
    Ground rent average would be a totally unfair way to calculate the price of a lease extension and would mean that it would be a poor value purchase.
    Yes.
    Any reasonable calculation of the value of future ground rent, for the purpose of a lease extension, needs to take into account that the real value of ground rent in future years will almost always be less than today as a result of inflation - even if the amount has doubled, or quadrupled.



    Originally posted by GarethB View Post
    It is not the cost of the ground rent that is bothing me, it is the huge possible cost to extend the lease.
    The cost to extend the lease (if you want to remove the ground rent) should reflect the real value of future ground rent payments, taking into account inflation - so the equivalent value of a payment of £1600 per year that would need to be made in 110 years time may be less than £100 if it is paid today.

    Of course, if you really aren't bothered about the cost of the ground rent, you could try negotiating an informal lease extension that doesn't remove the ground rent.

    Leave a comment:


  • AndrewDod
    replied
    Ground rent average would be a totally unfair way to calculate the price of a lease extension and would mean that it would be a poor value purchase.

    Obviously in the face of inflation the real value to the lessor of (for one decade each)

    a) 100 100 100 100 100 100 100 100 100 100

    b) 10 10 10 20 20 20 30 30 30 820

    Would be far far greater for (a)

    Do anyone who purchases a deal based on simple future averaging in the face of inflationary increases needs to rethink what they are doing.

    The problem, as always, is not with the fact of inbuilt and contractually agreed GR increases (which is fine) but with the thinking about them.

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  • Section20z
    replied
    Originally posted by GarethB View Post

    So with your calculation, worse case £15,189 + cost of £5000 total £ 20,186. please see attached how it was calculated with ground rent average over the term ( £630).

    All seems very complicated and onerous.
    Yes and those with a vested interest will make it appear more onerous than it is but if I was the freeholder I would be seeking at least 20k to give up that ground rent, but that really comes down to personal circumstances and what alternative use he can put the money to.

    With an informal extension you simply negotiate all the terms between you and you can approach the freeholder at any time to see how cooperative they might be.
    In this case they appear unhelpful ?

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  • GarethB
    replied
    Originally posted by Section20z View Post

    An informal extension can expunge ground rent.
    So with your calculation, worse case £15,189 + cost of £5000 total £ 20,186. please see attached how it was calculated with ground rent average over the term ( £630).

    All seems very complicated and onerous.

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  • Section20z
    replied
    MrSoffit,

    An informal extension can expunge ground rent.

    Leave a comment:


  • GarethB
    replied
    It is not the cost of the ground rent that is bothing me, it is the huge possible cost to extend the lease.

    Leave a comment:


  • Macromia
    replied
    Originally posted by AndrewDod View Post
    How much do you expect it to increase every 25 years?
    The point that Andrew was making is that, in most cases, these doubling ground rents really aren't the issue that they are made out to be - unfortunately mortgage companies don't seem willing to understand this.

    Even with the ground rent doubling ever 25 years, the 'real terms' cost will almost certainly fall.
    For example, if the lease instead linked the ground rent to inflation it is unlikely that anyone would question the increases (whether yearly, ten yearly, every 25 years, or whatever).

    Try putting the initial ground rent of £150 into the Bank of England 'Inflation Calculator' linked below, to see what a £150 ground rent in 2005 would be now if it had increased annually in line with inflation (it would have reached £225.66 in 2019 - so would already be higher than the rate that won't start to be charged for another ten years).
    https://www.bankofengland.co.uk/mone...ion-calculator

    Leave a comment:


  • GarethB
    replied
    Section20z,

    I tried to ask the freeholder for an idea of the cost but no joy, only the current owner can ask. Also the current will have to wait 30 days before they have an answer. The owners want to sell quickly and not prepared to wait 30 days! so the situation is I buy without knowing or I walk away.
    The intention was to keep hold of the property but not really sure how much the new legislation will impact on lease extensions, if any at all!

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  • GarethB
    replied
    I did an average for the the ground rent over the period of the lease and put it into the lease extension calculator, plus £5000 for costs as will need to pay for their surveyor and solicitor as well as mine. Plus if it goes to first tier tribunal there would be added costs.

    Leave a comment:


  • MrSoffit
    replied
    Hi.

    Sadly I learnt the statutory formula for original 99 year leases - that's the graphs of relativity what I've seen.

    Whether extending even in two years is a financially sound priority is for you to decide. I wouldn't go the informal route at any event - that's not going to remove the GR.

    If you do extend after waiting two years, and assuming uplift is small (I've no idea how much a 108 year lease uplifts in value after an extension)...

    There is no marriage value in the formula to worry about anyway.

    On the figures you supply and assuming you extended the statutory route now, the ground rent as described...

    capitalises to £3650 if yield assumed to be 6%.
    capitalises to £4870 if yield assumed to be 5%.
    capitalises to £6990 if yield assumed to be 4%.
    capitalises to £10969 if yield assumed to be 3%.

    The reversion depends on the discount rate applied...

    If discount rate 5% = reversion £508
    If discount rate 4% = reversion £1500
    If discount rate 3% = reversion £4220

    Add capitalisation to reversion to get premium. Then add fees for both sides (you pay).

    Where did you get £30K from?

    You can't know what the yield or discount rate will be until the 'experts' tell you. That is why everybody hopes for a fixed formula.

    It's all theological codology anyway.

    Leave a comment:

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