Informal lease extension advice - linked with RPI

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    Informal lease extension advice - linked with RPI

    Hi, I hope all is well. I've read some fantastic and very helpful advice on this forum and hoped someone may be able to help me with the particularities of my situation.

    I am currently helping my mother extend her lease. As she is eager to sell the property in the near future, we do not want to take the 1 year+ for statutory lease extension. Therefore, we have decided to go for the informal lease extension route.

    For context:
    The flat has just 61 years remaining on the lease and the ground rent is currently fixed at £25 per year.
    The flat has a market value (with a long lease) of around £190-220k (based on estate agent valuations).

    The freeholder has made an offer to us as follows:
    A new 125 year lease.
    Ground rent of £175 per annum.
    Ground rent to be reviewed every 15 years and rise in line with RPI.
    Premium of £24,000.

    I am wondering if this is a reasonable offer? And most importantly, if there are any issues with these preliminary details that could in some way hold up the sale of the apartment or otherwise prevent first time buyers from getting a mortgage from some lenders?

    In particular, I am concerned about the linking with RPI and whether this could prove an issue.

    My mum is of the opinion that since the new owners could simply extend the lease via the statutory route after 2 years, there is nothing to worry about. As the new owners can pay a relatively small amount to do the statutory lease extension and hence bring the ground rent down to zero. Therefore meaning the rise with RPI would never actually happen as the new owners would likely extend the lease before the first review and gain a ground rent of zero. Is this correct?

    My lawyer tells me that RPI linkage is common and should prove no issue to sale. And whilst I appreciate this is not a doubling ground rent, I am still a little concerned given the news over recent years with rising mortgages.

    Any help, advice or suggestions of lawyers / mortgage companies / anyone to talk to, would be enormously appreciated!

    Thank you, Niall

    The ground rent should not be allowed to rise at intervals of less than 21 years or the buyer or leaseholder may have difficulty getting a mortgage offer from many lenders .

    What is the current value of the property with 61 years remaining on the lease ?

    What is the market value after statutory 90 years lease extension to 151 years at peppercorn ground rent ?


      That's not a bad deal and your mum is right , the new owner can always extend for a pittance. For negotiation you could always mention the above advice and ask for 30 year rent reviews, but as you have realised it will likely never take affect anyway.
      (I grant informal extensions with rent reviews on future sales, which in this country is every 6 years, and it's never caused a mortgage issue )


        Thank you both for your help and advice! Greatly appreciated.

        The value without lease extension is likely around £150k. We had the property for sale at £170-180k a few years ago without the lease extended and it did not sell.

        After statutory lease extension the value would be somewhere between 190-220/230 (various valuations from estate agents).

        What is the issue regarding the intervals of 21 years? I've not heard this one before.

        Also, my concern regarding RPI is that (if I understand correctly) when the new owners go to extend the lease, the premium they pay will be dependent on the amount of ground rent the freeholder is losing by the lease being extended to zero ground rent. If the ground rent rises every 15 years with RPI from a base of £175, that means a rise to roughly £271 after 15 years, then £419 after 30 years, £648, £1002, £1549, £2395, £3703. These values are based on applying the previous 15 years RPI. Therefore, the total ground rent the freeholder would be "losing" if the new owners go to extend via statutory route in just 2 years time after buying would be very large! Would this make the premium very expensive for them? I cannot find an online calculator that allows you to calculate the likely premium of lease extension with rising ground rents. All of them give fixed ground rent calculators.

        If anyone knows a calculator that can be used to calculate likely premium with RPI raising ground rent. Or a fairly cheap service I can instruct to calculate this. My concern is whether the new owners will face any difficulties or (as detailed above) they will just be able to extend the lease via the statutory process for a few thousand pounds and have the RPI-linkage will make no difference.

        Thank you!


          A ground rent of £175 linked to the RPI every 15 years should not be the cause of any anxiety

          However the “success” of the various leasehold lobbying groups has helped create a fear that this is somehow the work of the devil and should be avoided at all costs - of course that means that all those with such similar leases are now finding that any sale they have will be inconvenienced by the need to get deeds of variation or worse still having to go through a full blown statutory lease extension to rid themselves of the rent

          If you want to sell the flat with as little stress as possible see what the additional premium would be to have the rent fixed . It should add a further £2000 to £3000 to the premium


            Thanks sglacy! So if I understand correctly:

            The deal on the table is not a bad one and really shouldn't be a problem to mortgage providers?

            However, given the current climate and concerns over increasing ground rents, the link to RPI may still prove off-putting to potential buyers?

            My Mum is of the view that we should lower the initial ground rent to £100 or £125 but agree to RPI linkage every 15 years. Her main concern is making sure the ground rent is very comfortably below the 0.1% value of the property for the initial sale.

            I'm inclined to try and negotiate a fixed ground rent that is not linked to RPI. I realise RPI-linkage should not be a problem but in the current climate I'm concerned that all rising ground rents may become an issue. Also, due to the rule changes that occur for leaseholders when the ground rent rises above £250.

            However, I'm unsure if I'd basically be paying the additional £3,000 (to make the ground rent fixed) for no real benefit!


              Paying the additional £3,000 would deal with the irrational fear that a buyer or his solicitor has over a ground rent linked to the RPI could somehow blight the property and ensure the sale goes through ok.

              If the ground rent can be lowered to £125 and reviewed to the RPI every 15 years and perhaps pay an addition £1,000 might be a solution

              The Road Fund Tax on a Fiat 500 is around £175 per annum and can be expected to rise in line with inflation if not a great deal more. That financial burden does not impinge on the sale of a car costing £12,000. Why a ground rent of £175 on a flat costing £200k should blight its sale prospects and have words such as onerous, unfair, exploitative, second bite of the cherry attached to it when it's set out in a lease and considered by the purchaser with their professional advisors before committing to entering into the contract is staggering.


                Fantastic, totally understood! Thank you And agreed, it does all seem a bit mad.

                And out of the two options of:
                1. Paying say £3,000 more to unlink from RPI (though it will probably be a bit higher as my Mum wants the ground rent to be lowered to £125 or below regardless of RPI-linkage or fixed).
                2. £1,000 more to bring the starting ground rent down, but allowing linkage to RPI.

                Which would you say would be least obstructive to sale? Or very little difference.

                Thanks again


                  NiallOisin why doesn’t ur mum simply trigger section 42, then passes on the benefit to the buyer on completion? In my opinion, this would be a more attractive option to buyers, since they would not have to worry about extending the lease and the ground rent would be 0.


                    I value the lease extension assuming extended value of £220k at £29 - £29,500 for a lease extension to the statutory model, so that should give you a guide to where to settle. I think it is OK to say to the freeholder that I am only prepared to buy a lease extension at a nominal fixed ground rent of, say, £50 pa but bottom line I will go to £30K to include your solicitors costs. That's a fair deal. Some freeholders are less commercial, however.

                    I find RPI ground rents very unsatisfactory because firstly there can be slight differences of opinion in the method of calculation turning on the wording of the clause and secondly because they cant be dealt with by a standing order and hence are a bit of a paperchase.

                    Doubling ground risks.

                    Here are some figures for the effective annual return for ground rents that double at predetermied annual frequency (source Savills)

                    33 yearly 2.12%
                    30 yearly 2.37%
                    25 yearly 2.87%
                    20 yearly 3.75%
                    15 yearly 4.75%
                    10 yearly 7.25%
                    5 yearly 15.0%

                    Any freeholder who nowadays seeks doubling at more frequently than 25 yearly is pushing his luck and should be resisted and any solicitor who lets a client agree to doubling 20 yearly, or more frequently is a berk/ negligent.

                    Interest rates and effective rates of return were much higher in the past which is why more frequent reviews (say twenty yearly) in the past were not necessarily wrong, but fall nowadays to be bought out as lenders will be a bit sniffy - even if the effects of inflation may well mean that they do not have much of an impact on value.


                      Babyspice thanks for your message! My mum was originally wanting to trigger section 42 and assign the extension to the buyer as you suggest. However, our concern is that first time buyers may not be able to afford to extend the lease immediately upon buying. The cost of extension is likely to be somewhere around £25-31,000 via the statutory process. So even though the buyers may be able to get a mortgage on the property they might not have the liquidity (in addition to the deposit) to pay this large sum for extension! Therefore, it may put off first time buyers (and this property would mainly be marketed at this group).

                      Therefore, we thought the property would be better marketed with a new lease (if only a 125 year lease rather than full extension)..


                        Thank you flyingfreehold , that's very helpful!

                        I think I'll try to negotiate down the ground rent to £100 and get it fixed (not linked to RPI) if I can. Hopefully they do not up the premium too much. Previously I was told that a ground rent of £175 linked to RPI would have a premium of £24,000, but if it is fixed at £175 (no RPI) the premium would be £27,500. So an increase of £3,500.

                        My mum wants the ground rent to be below £150 just in case something big happens to the property market (Brexit, COVID etc.) and the value of the flat drops for whatever reason (hence threatening the 0.1% ground rent issue with mortgage providers).


                          NiallOisin I see, However since they will be buying the flat at a “discounted” value, they can always either add the amount to the mortgage or get a loan to finance it. Personally, having a GR review every 15 yrs, would get me very nervous, also I am not sure that lenders will be fond of it. In addition linking to RPI, another unknown variable, like flying freehold says, it might get tricky to calculate. Me personally, I would never buy a flat on GR linked to RPI and reviewed every 15 yrs. I do not find these terms attractive.

                          My understanding of the formal process is that it is time bound and takes no more than 6 months. Why did u say on a previous post that it would take a year?


                            So the figure of 1 year+ I took from a lawyer I spoke to recently who explained that the formal process can frequently take 12 months and over if the freeholder wishes to stretch out the process or simply doesn't treat it as a priority. And then of course there is the likelihood of tribunal etc. I think it can be done in 6 months as you say, but I believe it can stretch to 12-18 months even...

                            And I understand entirely your point regarding the chance to take out a loan. I think, as you say, I just need to decouple the lease from RPI. Even if mortgage providers don't see it as a problem, there's clearly a large number of potential buyers who would be concerned by it in the current climate!


                              Originally posted by Babyspice View Post
                              My understanding of the formal process is that it is time bound and takes no more than 6 months. Why did u say on a previous post that it would take a year?
                              Statutory lease extensions can take longer if there is any disagreement (but then again, so can informal lease extensions if the parties cannot agree on the details).


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