991 year lease with rising ground rent linked to RPI

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    991 year lease with rising ground rent linked to RPI

    Hi, looking for some advice as I am process of buying a leasehold flat in London which was built in the last 10 years.
    The lease is 991 years remaining, and the ground rent is £300pa which is normal for the area.
    However the lease says it increases every 10 years in line with RPI - Retail Price Index (All Items)

    My solicitor said rising ground rents can become an AST (Assured Shorthold Tenancy) if later goes over £1000 (in London, and £250 elsewhere) which could result in losing home if fail to pay ground rent.
    This could then affect mortgages/selling in future.
    But he also said it is very common problem these days, and the government have said they will fix this unintended loophole in the law (although not done yet).
    So I am not sure if I should be concerned or not.

    My questions are:
    1/ Is a rising ground rent linked to RPI very common/standard these days? or is it something I should avoid?

    2/ If so, aren't mostly all modern flats going to have the same potential problem with becoming an Assured Shorthold Tenancy, and is not specific to this purchase?

    3/ Is it worth asking and paying extra for a deed of variation to the lease? (I suspect the freeholder would decline as is large development with other flats on similar leases)

    #2
    It is evidence of the near hysteria that has broken out over the last few years over ground rents by various lobbying groups that a ground rent of £300 linked to the RPI should now be seen as a problem likely to impinge on the sale prospects of a flat in London. There are serious issues in the management of leasehold that need to be addressed and this side show over ground rents detracts from the debate. The lobbying group have blighted many leaseholders who had high ground rents. Instead of the high ground rent being considered carefully and resulting in a reduction in the value of the flat of a few thousand pounds lenders underwriting requirements have made them unmortgeable and severely impacted the value of the flat.

    If the Government were to propose that the state pension (which is also indexed linked to a number of indices including the RPI) was to be reviewed every 5 years, there would be riots on the street. A Road Fund Licence on a largish car is around that figure yet the sale prospects of that car costing a fraction of the price of the flat is in no way blighted by that tax.

    A ground rent is of course for no service – the lease makes that clear. It is a financial burden placed on the property and is part of the overall consideration sought by the developer when disposing of the flat. There is nothing wrong with an indexed linked rent PROVIDED its financial burden is factored into the offer made.

    There is conflicting legal views as to whether the landlord would have mandatory grounds for possession if the ground rent exceed a certain level and was outstanding for a few months. It is certain the Government will step in, if it is an issue for a lender then your vendor should apply to the freeholder and see if a deed of variation can be negotiated

    The freeholder may well agree to a deed of variation but less likely on the rent

    The vendor if having owned the property for 2 years could make a statutory claim to extend the lease by 90 year to 1098 yrs with a peppercorn rent. The premium would be simply the discounted value of the rent . The value of the reversion ( the flat even if it was worth the entire GDP of the world would still be a fraction of a penny ) is of course nil.

    The ground rent would be discounted at around 3.25% giving a premium of £9,230 plus your own costs and that of the landlords – expect to pay around £5,000 in fees

    Comment


      #3
      Many flats with ground rent doubling every 10 years are not mortgageable and some High Street lenders are refusing to offer loans on all leases with ground rising after 10 years. So you should consider asking the seller to reduce the sale price by £9,230 .

      Comment


        #4
        Thanks. I was thinking about lease extension to set ground rent to peppercorn. But was worried the cost would be 991 years worth of ground rent? Making it very unaffordable to extend lease. Hopefully you are right, as the costs you mentioned are much more affordable and I would be ok spending 5 to 10k.

        Yes I think the doubling ground rent every 10 years scandal has made people and lenders cautious, myself included.

        But doubling ground rent is different to RPI increases though right?
        A doubling rent is not linked to inflation and therefore likely to become unaffordable in the future and mortgage lenders will not lend to that. Many of these leases have now been amended to RPI after a government pledge.
        RPI based means in theory it will always be the equivalent of £300pa in today's money which is affordable. So it will only go up if everything else goes up (average salaries, cost of other goods etc).
        From my research it looks like most mortgage lenders will lend to RPI increases, although I will soon find out for certain with my chosen lender. It does seem that many other flats in the same development have sold in the last year so doesn't seem like issue.

        So I don't think is problem right now, just my worry is about selling/mortgages in the future. But from what I can see, all new builds have similar 999 year leases with similar ground rents, so I would imagine it would affect lots of people if becomes problem.

        That said, is still some concern to me. What kind of deed of variation if any could be asked for? A capping of ground rent, or to prevent it becoming assured tenancy?

        I will see what my solicitor says, but useful to get different opinions.

        Comment


          #5
          Over the past 100 years prices have increased approximately 5 fold (500%)

          So how much would you expect ground rents to change??

          However a lot of that increase occurred in just a few years of the Labour Government catastrophe in the 1970s when inflation hit 25% as a result of magical thinking.

          Nothing at all wrong with RPI increases. As suggested above it is a convenient distraction from actual rampant fraud in the leasehold sector.

          Comment


            #6
            While I agree that there is nothing intrinsically wrong with an index linked rent, I would take the issue back a stage and ask: What is the justification for charging rent on the grant of a long lease at a premium?

            Comment


              #7
              Originally posted by Lawcruncher View Post
              While I agree that there is nothing intrinsically wrong with an index linked rent, I would take the issue back a stage and ask: What is the justification for charging rent on the grant of a long lease at a premium?
              There isn't. Except that this is what is bought and priced. You could make the same argument about a lot of things (what is the justification for a blob of gold costing £1000, or a Monet picture, or for Amazon marketplace taking a percentage of the postage fee from sellers, or for Tesco to sell a tin of beans at a 1% profit vs some other number like 100%). You read the contract and you decide whether to contract.

              I suppose a small ground rent could be "justified" to cover freeholder direct costs that are not recoverable as service charge (such as their personal liability insurance, office paperwork).

              Comment


                #8
                Originally posted by Lawcruncher View Post
                While I agree that there is nothing intrinsically wrong with an index-linked rent, I would take the issue back a stage and ask: What is the justification for charging rent on the grant of a long lease at a premium?
                It's part of the overall consideration for taking on the lease. A ground rent is for no service at all and that is clear from the lease and it is therefore is a financial burden on the property. The lessee through their solicitor/surveyor need to consider what that burden is and bid for the property accordingly

                To assist in calculating the value of the burden the Net Present Value of the rent should be shown next to the premium paid with the ground rent discounted using a prescribed rate. In that way the lessee knows what they are entering into prior to taking on the lease

                If a flat worth say £300k is sold with a ground rent of £10k per annum linked to the RPI every 5 years for a reduced premium of £50k, the purchase of that lease can hardly say later on that the rent is unfair. On commercial leases it can be seen as a means of financing the deal

                Comment


                  #9
                  There is something in what both AndrewDod and sgcacy say, though I think they do rather ignore the reality of how things happen in practice as the average purchaser thinks of the premium as the full consideration. Rather than discuss that, I will rephrase my question:

                  What is the justification for charging rent on the grant of a long lease of a flat sold at a premium when freehold house have no such "extras" attached to them? Why cannot it not be the case that the whole of the value is paid up front which, as I say, is what a purchaser of a flat thinks he is doing?

                  Comment


                    #10
                    Lawcruncher,

                    Your point is taken -- but I think the disconnect between what the buyer perceives (which is more a matter of lack of concern about what they are actually buying and failure of solicitors to educate their clients) and what they are purchasing goes far deeper than the matter of ground rent.

                    If they don't understand the ground rent issue, they also don't understand the many other massive problems with purchasing a leasehold property - most of which massively eclipse the ground rent misunderstanding. Which is exactly why the focus on ground rents is a convenient distraction.

                    Obviously there will always have to be properties which are in a leasehold form of some sort. But I think that reality is not factoring enough into the price of the initial sale, -- and the discount that should be applied is much higher than it need be as a result of the abject failure of legislation to protect leaseholders (both in its construction and implementation).

                    Comment


                      #11
                      In the middle of purchasing a flat, I face the same situation. May I know what your final decision was? Have you pulled out?

                      Comment

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