Variation of lease

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    Variation of lease

    I own a flat with a lease of 125 years starting from 2012. The ground rent is at present £150 pa, but increases as follows every ten years: £225... .£337.50.... 506.25.... 759.38.... 1139.06.... 1708.59.... 2562.89 ....3844.34. There are no more increases after eighty years. I am considering a variation of lease with the increases going up every ten years by Retail Price Index. The freeholders have agreed to this.

    Which would be a better deal (for the purposes of resale in say, five years time)? Which would mortgage providers be happier with?

    The flat is rented out on an assured shorthold tenancy.

    I hope somebody on here may have some advice for me. Thanks x
    Last edited by scampicat; 25-02-2020, 09:08 AM. Reason: edited to make clearer reading

    #2
    Hi Scampicat

    As an alternative you could consider extending your lease and reducing ground rent to peppercorn (nil). This would be the most attractive proposition to potential purchasers and mortgagees.

    There are two routes to extending your lease: informal - i.e. agreement by negotiation with the freeholder; or the Statutory route: 90 years will be added to your lease and your ground rent will be reduced to peppercorn rent.

    In either case, you will pay the freeholder a premium and their legal/valuers fees as well as your own.

    (Mortgagees are not keen on rising ground rents.)

    Comment


      #3
      Thanks for your reply. I didn't really want to get into the cost of a lease extension. My husband is having a fit about the £700 the variation will cost!

      Comment


        #4
        There is a table of mortgage lenders attitude re this issue. I'll see if I can find it.

        Comment


          #5
          Here it is. https://www.cml.org.uk/lenders-handb...ion-list/1852/


          Comment


            #6
            As your lease is already a long lease the extension might not cost as much as you think. However, the rising ground rents related to your lease will add to the premium. Nevertheless, arguably with an extension you will be incurring costs BUT adding to the value of your lease and saving ground rent going forward. It might be worth at least looking into likely cost of an extension particularly as you intend to sell in c. 5 years for the reasons stated in my OP.

            Further, I would suggest forecasting ground rent based on RPI to see how the numbers might compute. After all, if your freeholder is willing to vary the lease accordingly it might be to your disadvantage though not necessarily (I don't know your freeholder).

            Good luck

            Comment


              #7
              From my understanding of RPI (and someone can correct me), the percentage is not fixed. The current RPI is 3.1% and it's projected to increase to 4.2% in 2024.

              RPI ground rent is calculated based off the current value of the property. Say, your property value increases to just £10,000 in 10 years. That means, if the RPI ground rent in 10 years is 4.2%, the ground rent will increase to £882, which will be more than your current ground rent increase deal.
              Attached Files

              Comment


                #8
                RPI is just one of several ways of measuring inflation. It produces an average percentage figure for price increases over a given time period.

                If the increase in ground rent is linked to RPI, the increases will not be known until they become due - they could be lower than the amounts currently stated in your lease (and typically would have be in most recent decades), but linking ground rent to RPI could result in far higher payments.

                My understanding is that you are proposing that the RPI percentage is applied to the ground rent amount, not that ground rent would become a percentage of the property value (which is what TruthLedger seems to be suggesting).

                You can use online RPI calculators to see how much ground rent would be now if your lease had started 10, 20, 30 years ago (and so on).
                For example, using the calculator below, ground rent from January 2019 would have been £382.43 if the lease had commenced in January 1989, compared to £506.25 after 30 years under the current terms. However, if the lease had started in January 1969 the amount due from January 2019 (50 years later) would be £2,488.28 compared to £1139.06 under the current terms - and the amounts payable would have been much higher than the current terms since the first increase due to high inflation during the 1970s (the first increase, in January 1979 would have been to £461.78).
                https://www.erikasgrig.com/calculato...ator-inflation

                IMO looking to get a statutory lease extension, an by doing so reducing ground rent to 'a peppercorn' (i.e. nothing) would be a better option if you are genuinely worried about ground rent and how it might affect resale value.

                Comment


                  #9
                  Thank you all for for your very helpful and informative advice. My husband and I will mull through the options later today.

                  Comment


                    #10
                    Originally posted by scampicat View Post
                    Thank you all for for your very helpful and informative advice. My husband and I will mull through the options later today.

                    Looking now and doing further research: A formal lease extension(rough estimate) will cost £4-5k plus fees, may be more. I do not think we will go with this option due to the cost.

                    Looking quickly at the list of lenders' criteria, many will accept RPI increases. Many will also accept rising charges as long as they do not double more than every twenty years. I have yet to look at this list in depth; I am going to look at the main mortgage providers to see their criteria.

                    I am no good at number crunching...can someone look at my OP and tell me if they double within twenty years? I don't think they do, but would like to be sure. Thanks in anticipation.



                    Comment


                      #11
                      If the ground rent in your lease doubled every 20 years the following ground rent would be due:
                      £150 per year from 2012 to 2031 (compared to ten years of £150 / ten of £225)
                      £300 per year from 2032 to 2051 (compared to 10x £337.50 / 10x £506.25)
                      £600 per year from 2052 to 2071 (compared to 10x £759.38 / 10x £1139.06)
                      £1200 per year from 2072 to 2091 (compared to 10x £1708.58/ 10x £2562.89)
                      £2400 per year from 2092 to 3011(compared to 10x £3844.34 then ?)
                      £4800 per year from 3012 to 3021
                      £9600 per year from 3022 to 3027

                      So your current lease terms are less favourable than a doubling every 20 years (at least in the beginning - the current terms may be more favourable near the end of the 125 year lease if £3844.34 is the maximum the ground rent will increase to - you didn't give any higher amounts).

                      If you change the lease to link increases every 10 years to RPI, your would expect the ground rent to increase to around £200 - £210 per year from 2022 to 2031.
                      After this there would be increased savings if inflation remains low, but ground rent could end up far higher than on the current terms if we go through a period with high inflation.

                      Comment


                        #12
                        Thank you so much for doing that, Macromia. So if I understand it correctly, neither the current terms nor the ones rising with RPI are particularly favourable, as it is the ten year increase that is the problem rather than the amounts?

                        (NB: There are no more increases after eighty years on the existing terms).

                        Comment


                          #13
                          Originally posted by vmart View Post
                          As an alternative you could consider extending your lease and reducing ground rent to peppercorn (nil). This would be the most attractive proposition to potential purchasers and mortgagees.
                          This is not always the case, some lenders consider low ground rent or peppercorn rent to represent a higher lending risk as they see potential for a disinterested freeholder who has less incentive to look after the estate.

                          Comment


                            #14
                            Freeholders maintain their estate using leaseholders' money and, do they ever pinch their own pockets? No wonder some are calling for the leasehold system to be (rightly so) overhauled.

                            Comment


                              #15
                              I've read the situation the lease is 125 years from 2012 and the main problem is the escalation of ground rent. I suggest you wait a few years by which time there will be likely to be a scheme in force for these ground rents to be bought out comparatively cheaply. You will be likely to pay less once this is on the statute book than now. It wont be a give away for tuppence but overall for an adjustment just to buy out of what are called "onerous" ground rents it will be likely to be less expensive than at present. Personally I am not attracted to RPI based ground rents because unlike a fixed ground rent of £50 per half year you cant set up a standing order and forget about it

                              Comment

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