Increasing ground rent after lease extension

TestZed

I am looking at buying flats to let and went to view one yesterday. Before we arrived the estate agent made a big deal about how the lease was recently extended, so I spoke to the owner

He said the lease was extended from 84 years to 170 years last year. But the ground rent is still doubling every 25 years, such that in 2150 it will be nearly £15000 per year

Unless we discover how to extend lifespan, none of us are going to be around by then, however, I thought that recent lease extensions result in the ground rent being reduced to a peppercorn

I don't know if I was missing something so didn't say anything at the time, but can anyone explain why he would have agreed to this rent escalator?

ognum

TestZed wrote: »

I am looking at buying flats to let and went to view one yesterday. Before we arrived the estate agent made a big deal about how the lease was recently extended, so I spoke to the owner

He said the lease was extended from 84 years to 170 years last year. But the ground rent is still doubling every 25 years, such that in 2150 it will be nearly £15000 per year

Unless we discover how to extend lifespan, none of us are going to be around by then, however, I thought that recent lease extensions result in the ground rent being reduced to a peppercorn

I don't know if I was missing something so didn't say anything at the time, but can anyone explain why he would have agreed to this rent escalator?

I have found that this on a few flats I have viewed, I actually offer d on one and withdrew when my solicitor got the full lease details.

These are greedy freeholders, I would not touch this flat as in my opinion it will become very difficult to sell but that is a personal decision.

eddddy

TestZed wrote: »

I thought that recent lease extensions result in the ground rent being reduced to a peppercorn

Broadly, there are two ways to extend a lease:
- Statutory Lease Extension
- Informal Lease Extension

A statutory lease extension involves extending the lease by 90 years and reducing the ground rent to a peppercorn.

An informal lease extension involves the leaseholder and freeholder agreeing any terms they like.

So the flat you're looking at had an informal lease extension. I guess the leaseholder may have just accepted the freeholder's terms without taking professional advice.

Sadly, some naive leaseholders are agreeing informal lease extensions on such bad terms (i.e. increasing ground rents etc) that their properties become virtually unsaleable.

ognum

eddddy wrote: »

Broadly, there are two ways to extend a lease:
- Statutory Lease Extension
- Informal Lease Extension

A statutory lease extension involves extending the lease by 80 years and reducing the ground rent to a peppercorn.

An informal lease extension involves the leaseholder and freeholder agreeing any terms they like.

So the flat you're looking at had an informal lease extension. I guess the leaseholder may have just accepted the freeholder's terms without taking professional advice.

Sadly, some naive leaseholders are agreeing informal lease extensions on such bad terms (i.e. increasing ground rents etc) that their properties become virtually unsaleable.

There is often a trade off with informal lease extensions, I have done one and probably agreed a slightly larger payment for the lease extension to get a 99 year extension with peppercorn ground rent as despite it being a let property it will be more saleable in the future.

Cost of lease extension will be included in capital cost when sold.

eddddy

ognum wrote: »

There is often a trade off with informal lease extensions, I have done one and probably agreed a slightly larger payment for the lease extension to get a 99 year extension with peppercorn ground rent as despite it being a let property it will be more saleable in the future.

Cost of lease extension will be included in capital cost when sold.

... and the legal costs for an informal lease extension tend to be lower than for a statutory lease extension.

So it can make sense to offer the freeholder more money to go down the informal route, rather than the statutory route...

... as long as you understand the pitfalls, and do all the due diligence.

julialease

Sounds like he went staight to the freeholder rather than using the leaseholder 1993 act to get the extension. If you use the 1993 act groundrent gets reduced ,if you go straight to the freeholder he can do what he likes, i have the same issue at the moment the rent doubles every 10 years it went from £50 a year after the extension it went to £350 and then doubles every 10 years .long term this means the leaseholder would never beable to afford to buy the freehold or get the 99 year extension because the premium you have to pay the freeholder for the 99 years is calculated using a % of what the freeholder would of got in groundrent in this case over the 85 years left on the lease it would work out at 1.5 million so if the calculation was just 1/2 % of that it would be 50k 3 times what the flat cost to buy. Warning dont ever buy a flat from regisport ltd

Freecall

Doubling a value over 25 years requires a 3% growth rate. This compares favourably with the long-term UK inflation rate.

Actually it’s better than that because this is only a once every 25 year revaluation so there is effectively a lag of 25 years.

In real terms you will probably be ahead of the game on these figures. Just don’t focus too much on the actual numbers in £ as they may frighten you.

HouseBuyer77

Note that a doubling of every 25 years will result in similar increases to a 2.8% increase every year, though with the advantage that the rent just goes up in a big jump every 25 years rather than a small amount every year (so after 25 years the double rent option would give you a similar new rent to what you would get at year 25 of 2.8% every year).

The doubling terms are often nasty but this one doesn't seem so bad. However I don't know how lenders view them. Hopefully they take the sensible view (they're ok provided the doubling term is long enough).