High ground rent

jon783

Hi All,

I'm a first time buyer, trying to buy a leasehold flat. As part of the sale the current owners are extending the lease, currently the ground rent is £25 a year With the new lease it will be increased to £150 a year, and will be at least doubled every 20 years. This seems high to me, and I'm concerned that it could put off buyers when I look to sell. Does anyone have any experience of this? Does this seem high? And do people think this could put off future buyers?

The flat is in Nottingham, so not London style prices.

Thanks for any advice.

Errata

£3 a week is the price of a bag of chips, so nice and low - not high.

ChumpusRex

The ground rent in itself is not abnormally high.

However, the increase in the rent is unusual, and may devalue the property (but not by a massive amount).

Paully232000

ChumpusRex wrote: »

The ground rent in itself is not abnormally high.

However, the increase in the rent is unusual, and may devalue the property (but not by a massive amount).

I am not sure how much it would devalue it as £150 is not too bad and at least you know what it is likely to be for the next 20 years.

I suppose the wording 'at least' double may be concerning, but not for another 20 years.

princeofpounds

Ha that is not a high ground rent, you should see what some new developments are trying to charge.

In low interest rate environments buyer often undervalue ground rent. At 3% long term mortgage rate (as it is a long-term liability) 100 quid of ground rent is effectively equivalent another 3300 of mortgage.

Hence it has become a favoured tool of developers.

The escalation clause is not so weird either. Doubling every twenty years is equivalent to an annual inflation rate of 3.5%. I don't know what long term inflation is going to be, the markets would currently tell you less than this, but it's not on another planet.

Escalation clauses are another way of making it even more valuable. And punters naturally find them even harder to value! At a guess it probably at least doubles the market value of your 'cashflow stream'.

jon783

Thanks for the replies all.

ognum

ChumpusRex wrote: »

The ground rent in itself is not abnormally high.

However, the increase in the rent is unusual, and may devalue the property (but not by a massive amount).

I think this is a high GR for an extended lease, many lease extensions are negotiated to a peppercorn or zero rent.

I have withdrawn from a purchase due to an escalating ground rent and the probability the property will be difficult to sell in the future when the lease is shorter and the GR very high!

TrickyDicky101

How long have the sellers owned the place for? If over 2 years then they could go for the statutory extension route which would result in a peppercorn ground rent.

ognum

TrickyDicky101 wrote: »

How long have the sellers owned the place for? If over 2 years then they could go for the statutory extension route which would result in a peppercorn ground rent.

The problem comes when there is a new freeholder, with the property I withdrew from the new freeholder on purchase offered a new 125 year lease, with this he created an escalating ground rent, the right to charge what he wished for water supply and covered the roof in solar panels that belonged to the freeholder in order to maximise his profit.

In these flats the ground rent doubled every 5 years, starting at £300 per annum so by year 10 the ground rent would be £1200 per annum and by year 15 £2400 per annum.

This was not found until I read the lease very carefully, all these flats have sold, my guess is they didn't read the lease carefully enough!