Lease extension with rising rent

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    Lease extension with rising rent

    Having trouble finding a definitive answer to how statutory lease extension is valued with rising rent , my lease has 84 years left at £1020 current ground rent rising on sale of flat by £5/£1000 increase in value.
    ​​​How does this affect cost of extension ? (flat worth £200,000)
    Thanks for any help.

    Is that a mistake or do you genuinely pay £1020 per year in ground rent?

    I'm sure that makes the flat unmortgageable because of the ground rent:value ratio. You should go for a statuatory lease extension that eliminates ground rent, you have 84 years left so maybe better waiting for the leasehold reform announcements over the next couple of years. I can't comment on how the rising ground rents effect the lease extension premium. Maybe someone else can assist on this because I would be interested to know too.


      Did the lease term start from 99 years or 125 years ? and what was the starting ground rent ? What was the last sale price ?

      The starting ground rent should not exceed 0.1 % or 0.2 %of first sale price ( or mortgage lenders may refuse to offer mortgage loan ).

      There is a free guide to "valuation for lease extension" at LEASE but I don't know if example in 8.3 can help you:


        99 years at £100 gr last sale was £180,000


          If the property was first sold in 2006 at £100k, with ground rent starting from £100 p.a

          Then after the last sale at £180K , the ground rent would rise from £100 ( starting ) to £100 + £5 x 80. = £500 p.a ( current ) .

          After a 15 years period , for the annual ground rent to rise from £100 to £1,020 ( = 10x increase ), the lease is not mortgage-able and you should make a complaint to your local MP and to CMA ( Competition and Markets Authority ).


            The premium would consist of two parts

            The capitalization of the ground rent

            The ground rent in a sense has a link to the increases in prices and would therefore be reviewed on every sale . On average for a flat it is about once every 11 years. Therefore you could state the rent rises in line with the movement in house prices and is reviewed every 11 years . Ordinarily for a very large rent of £1,020 it would attract a capitalization rate of around 5%. The fact it rises in line with house prices could result in a further 2% being taken off the capitalization rate to give 3%.

            NPV = C x {(1 - (1 + R)-T) / R}

            £1,020 X ( 1 - 1.03 ^ -84) / 0.03

            £1,020 X ( 1 - 0.083497) / 0.03

            X 30.55 = £31,161

            Capitalisation of the rent – say £31,161

            Value of the reversion

            £200,000 discounted back at 5% over 84 years =

            £200,000 / 1.05 ^ 82 = £3,320

            Therefore, I believe the premium to be £31,161 + £3,320 = £34,481

            Whilst the Government have put forward proposals the problem is that they are just that. In your case you would have considered the ground rent at the time of purchase as it was very large. It could well be argued that you knew what you were taking on. A ground rent is for no service – it is a financial burden on the property and detracts from the value of the property, and therefore it is likely that the price you paid for the flat took into account the rent you were to pay, and therefore the government proposals may not extend to you in such a case

            The government published in its consultation paper the Law Commission in January 2020 “Leasehold homeownership: buying your freehold or extending your lease”

            In paragraph 6.149(2)

            Specifically-negotiated lease arrangements. Sometimes, a lease will be granted which appears for all intents and purposes to be a very typical long residential lease – save that it happens to have been granted for a nil or very low premium, because that is the agreement the parties have reached. In many of these cases, it would not be surprising to find a high or onerous ground rent liability within the lease. For example, a well-informed leaseholder may have negotiated a significant reduction in premium purely because of the inclusion of a high ground rent in the lease. We have also heard of occasional instances in which a leaseholder has offered to pay a higher-than-average ground rent in order to secure a reduction in the premium payable to purchase the lease. One consultee told us that they have known high-net-worth individuals purchasing properties in the Prime Central London market to make such requests where they are only interested in acquiring the property for a relatively short lease term (albeit still over 21 years) and will have little interest in enfranchising. We therefore believe that this rent would fall into the exemption the Government would be expected to make for the reasons outlined above. In any event with the rent being so high it would be expected that when the flat changed hands the parties, as they were professionally represented would have thought about the implications of such a rent and reflected it in the price they paid.

            The lobbying groups wanting reform claim that the ground rent terms were unclear or written in “legal speak” which made it difficult to understand what the terms were and that all rent should be capped at no more than £250 and be allowed to wither on the vine as any inflation protection should also be removed. The proposal suggests that despite the leaseholder being legally represented during the conveyance that the contract term on the rent should in effect be torn up and renegotiated down. Needless to say, there will be very strong lobbying on this proposal and as in so many proposals will inevitably be watered down to get it through parliament


              THank you very much for that detailed response and yes, the price paid took into account the ground rent
              A surveyor actually attended yesterday to do a valuation so I will report back his findings


                You may find the article here interesting

                Long leases can sometimes be ASTs. An unintended consequence of legislation.


                  Well, finally received the surveyors valuation and he comes out at a premium of £24,507 using 5% capitalization and a freehold reversion value of £280,000.
                  seems crazy that these lease extension valuations are so subjective and now it could be a case of surveyors arguing it out between them.


                    A 2% difference on the capitalization rate moves the figure from £34.5K to £24.5K

                    The rent review provides a hedge against inflation, which is the problem with fixed grounds rents and makes it attractive. Ordinarily a ground rent as large as £1,020 would attract 5% if it was fixed, so the eventual figure will be lower than 5% . There is a strong argument that could lower it to 3% as I have suggested and depending on the firepower that is brought into action anything between 3% and 5% can be the final result . But the firepower may cost more than the difference !

                    At 4% ( not surprisingly about midway) it is £29.2K

                    Genuinely interested to know how this pans out - please do advise


                      Thanks and will do. But don't hold your breath , it may take months .. .


                        Any thoughts on what a reasonable informal offer would look like , whilst retaining some rising rent mechanism ?


                          Offer to have a ground rent of £200 per annum rising or falling in line with the RPI every 10 years and a premium of £24,000


                            Just to update, the informal offer has not been accepted and freeholder is threatening to apply to court to have S42 notice declared invalid due to not giving full 2 months time to respond (served by email without allowing time for service) and property not being correctly identified (flat number not given)


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