Views on ground rent of £300 pa doubling every 10 years

Joannef_2

I was wondering if anyone else can give me their views on this please. I don't think it is acceptable, and may cause problems on reselling or mortgaging.

Property is a conversion and the total building comprises of 3 flats on new 125 year leases. The ground rent is £300 per annum, but doubles every 10 years. It is a smallish one bedroom flat, part of which is within a cellar (it does have a skylight/window so not dark).

The other two flats are about to complete, so I assume that whoever is acting for these purchasers doesn't think that it's an issue. I don't think the landlord will budge on changing the ground rent for just one flat.

Thanks

TrickyDicky101

It would be a problem for me - should you desire to extend your lease at some point in the future (or acquire the freehold) the ground rent is one of the factors which will influence the cost.

I suspect you are correct that the landlord will not want to amend the GR on your flat, but you can only ask. Perhaps if you upped your offer slightly?

Richard_Webster

Do not touch with very long barge pole.

The flat will become increasingly more difficult to sell in the future and as has been said the size of the ground rent affects the amount you have to pay for a lease extension.

Joannef_2

Thank you for the replies.

I too think I should leave well alone, but just thought I would get a second opinion in case I was being too fussy (as some people think I am). Quite amazed though that the other two flats have exchanged without anyone questioning it.

tim123456789

Joannef wrote: »

I was wondering if anyone else can give me their views on this please. I don't think it is acceptable, and may cause problems on reselling or mortgaging.

Property is a conversion and the total building comprises of 3 flats on new 125 year leases. The ground rent is £300 per annum, but doubles every 10 years. It is a smallish one bedroom flat, part of which is within a cellar (it does have a skylight/window so not dark).

The other two flats are about to complete, so I assume that whoever is acting for these purchasers doesn't think that it's an issue. I don't think the landlord will budge on changing the ground rent for just one flat.

Thanks

There's no reason at all why they shouldn't. If buying from a builder, negotiating a change in the lease is no different to negotiating a change in the price. In two years time you have a statutory right to an extension at a peppercorn rent. There's no reason why you can't come to an informal agreement on doing it now.

It's really down to whether they can be convinced that leaving it as it is is an impediment to them selling it (at the requested price).

witchy1066

Joannef wrote: »

Thank you for the replies.

I too think I should leave well alone, but just thought I would get a second opinion in case I was being too fussy (as some people think I am). Quite amazed though that the other two flats have exchanged without anyone questioning it.

how do you know they exchanged without questioning, have you asked the buyers, they may have and got a reduction, or at least got the double in 10 years changed

is it not worth an ask ?

ValHaller

If it doubles every 10 years, at year 120, it will be 1.3million per year.

We don't know what is going to happen with inflation, but this is seriously stupid money.

This kind of escalator seems to be common in leases now - but give it a few years when everyone will be fully aware and properties with such ground rent clauses will become unsaleable.

tim123456789

Joannef wrote: »

Thank you for the replies.

I too think I should leave well alone, but just thought I would get a second opinion in case I was being too fussy (as some people think I am). Quite amazed though that the other two flats have exchanged without anyone questioning it.

You only have to watch a few episodes of "Phil and Kirsty help a numpty couple buy a flat" to see that there is a large percentage of buyers who don't ask a single question about the legalities of the leasehold property that they have "fallen in love with", before putting the money on the table.

OTOH your buyer might be me (currently risking a purchase falling apart over who is responsible for a 200 pound shortfall on the water bill).

tim

tim123456789

ValHaller wrote: »

If it doubles every 10 years, at year 120, it will be 1.3million per year.

We don't know what is going to happen with inflation, but this is seriously stupid money.

This kind of escalator seems to be common in leases now - but give it a few years when everyone will be fully aware and properties with such ground rent clauses will become unsaleable.

Doubling every 25 is now normal. At about 3.5%pa this means that it will, more or less, mirror inflation over the period

princeofpounds

The absolute amount of ground rent is not really a problem. One way to view such things is to capitalise the income stream into a lump sum. Typically ground rent investors might demand 6% yield or so (it varies with interest rate expectations, risk and many other things so this is just an assumption).

£300/0.06 is £10k. That's roughly how much more 'expensive' this ground rent makes the house.

BUT escalation clauses make the calculations more complex. They also make the ground rent far more valuable. Doubling every 10 years is way in excess of expected long-term inflation rates. Not going to do the sums as I have other things to do but you can see from the projections people have done that it's much more valuable.

Developers love things like this as it enables them to scrape a good deal more profit out of a development. Most buyers will only see the initial figure and few will understand how much it is 'really' costing them.

Now it would be my opinion that at some point over the next 120 years there will be a hyperinflationary event that will make even a 'doubling' ground rent worthless, but it's not apparent any time soon.

And if it doesn't happen then your descendents are going to have to buy the house all over again effectively (or more realistically, pay a larger sum for a lease extension in about 50 years time).

Maybe your horizon isn't that long, but in general I would just avoid leases like this.

propertyman

If you average inflation over 10 years at 3% £300 will be @ £405.

While the argument is that property prices increase on their own terms, it boils down to a person paying £700 "for nothing" and whether local flats are selling with GR at £200 to £400.

It is a huge obstacle, and even extending the lease is far more expensive that it might be as the premium takes into account this huge rent increase.

Watch out a for clauses that refers to RPI - they often double as well its just not apparent on the first reading!