Ground rent review at the 8th and then every 10 years!URGENT!!

nikxy

Hello

I am about to sign a 250 years "Buy to Rent" lease on a 2 year old flat, the lease commencing on the 1st of January 2007. I have noticed that although the ground rent is at this time £250, in 2 years, on the 8th lease anniversary, it will double to £500 and thereafter for another 2 times, at a 10 year interval, double again, to the maximum of £ 2000. The agreed selling price is £90.000 and the gross rent, is £650 pcm.

I think the frequency and amount of the increase are unreasonable, as neither rental income or the property value will go up by nearly similar percentages and thus it may may make a future sale of this property very difficult. Am I right?? Any and all advice will be apreciated.

Many thanks.

ValHaller

That equates to 7.2% inflation over the 30 year period. Seems steep to me. For you it will be 10% inflation over the period

I dunno, I know nothing about leases, but I am thinking a ground rent becomes too expensive above 1 months tenant rental and I would be looking for the price to reduce the notional mortgage to cover the asset by the amount the ground rent exceeds the notional reasonable ground rent in terms of monthly tenant rental.

princeofpounds

I think the frequency and amount of the increase are unreasonable, as neither rental income or the property value will go up by nearly similar percentages and thus it may may make a future sale of this property very difficult. Am I right?? Any and all advice will be apreciated.

It's very common now for developers to try to stretch a little more money out of selling property by ramping up the ground rent and selling it separately to a more financial investor.

They hope that buyers won't pay attention to it and many don't, at least not properly. Assuming that a typical ground rent investor might demand a 5% return on their investment then charging £1000 of ground rent per year to a leasholder is equivalent to selling the flat for an extra £20k. Many buyers won't do that sort of calculation to 'capitalise' the cost. But it's a big deal on a £90k property!

The escalation clauses are a further development in the strategy. It allows them to market a low headline number and understanding the true cost requires more investigation.

Unfortunately reasonableness never comes into the equation - this is purely a commercial matter. A long leasehold is one form of renting, ground rent is just another. As a 'buyer' you are expected to be able to do the math, as the Americans say.

The absolute amount of ground rent does not sound weird at all - assuming it is annual rather than monthly. The escalation clause is the excessive part, as the escalation is well above anticipated inflation.

This should not make future sale of the property THAT difficult. Ground rent is not uncommon. But it would have to be reflected in the price, one would assume.

nikxy

Thanks to one and all. After extensive consultations, I have now decided to go ahead with the purchase. One could say that I saw the tree but missed the forrest!!!