How much ground rent will buyers bear?

wwarby

I have a flat with slightly under 81 years remaining on the lease. I have served a statutory notice based on a chartered surveyor's valuation report to initiate the process of extending the lease. and the freeholder has approached me with an offer of a matrix of options for extending outside of the statutory process. The options all extend to 125 years (statutory would be 170), with upfront costs ranging from £400 to £4,000 - all lower than the £5,000 offered in my statutory notice. Each option carries a starting ground rent between £250 and £400, with four choices on how the ground rent increases over time:

• Increase by RPI every 5 years
• Increase by RPI every 10 years
• Doubling every 20 years
• Increasing by starting rent every 10 years (capped at 5th increase)

I'm looking to sell as soon as I've renewed the lease, so taking a negotiated offer appeals because it would be completed more quickly and cost me less. However, I obviously need to avoid saddling the property with ground rent terms that would make it difficult to sell or significantly affect it's value. Perhaps unsurprisingly, estate agents are advising me that a ground rent of £300 or less will be fine with most buyers, and my chartered surveyor is advising that some of the options offered would make the property unmortgageable, hence I am looking for additional opinions.

My current thinking is that most buyers won't draw much of a distinction between 170 and 125 years on the lease, and I suspect a ground rent of £250 or possibly £300 would be fine. I think the sticking point will be how it increases over time, and that's where I think I should be negotiating.

nomoneytoday

I'd personally go for one of the RPI increases, as that means it simply rises in line with inflation.

(Caveated that i'm not a property lawyer or similar, so this is a personal opinion)

HappyMJ

wwarby wrote: »

I have a flat with slightly under 81 years remaining on the lease. I have served a statutory notice based on a chartered surveyor's valuation report to initiate the process of extending the lease. and the freeholder has approached me with an offer of a matrix of options for extending outside of the statutory process. The options all extend to 125 years (statutory would be 170), with upfront costs ranging from £400 to £4,000 - all lower than the £5,000 offered in my statutory notice. Each option carries a starting ground rent between £250 and £400, with four choices on how the ground rent increases over time:

• Increase by RPI every 5 years
• Increase by RPI every 10 years
• Doubling every 20 years
• Increasing by starting rent every 10 years (capped at 5th increase)

I'm looking to sell as soon as I've renewed the lease, so taking a negotiated offer appeals because it would be completed more quickly and cost me less. However, I obviously need to avoid saddling the property with ground rent terms that would make it difficult to sell or significantly affect it's value. Perhaps unsurprisingly, estate agents are advising me that a ground rent of £300 or less will be fine with most buyers, and my chartered surveyor is advising that some of the options offered would make the property unmortgageable, hence I am looking for additional opinions.

My current thinking is that most buyers won't draw much of a distinction between 170 and 125 years on the lease, and I suspect a ground rent of £250 or possibly £300 would be fine. I think the sticking point will be how it increases over time, and that's where I think I should be negotiating.

Isn't there an option for peppercorn rent? I wouldn't consider a leasehold with anything other than peppercorn rent which in practice means no rent is payable. The statutory process gives you that.

HouseBuyer77

Did the surveyor say which options would make it unmortgageable? Going the statuatory route may well be a better long-term deal but as you're looking to sell ASAP you probably don't care. What were the renewal costs associated ground rent costs with each option?

I think the doubling clause is often one the lenders dislike. However as it's only every 20 years it's not much different from the RPI related ones (other than less frequent increases).

wwarby

HappyMJ wrote: »

Isn't there an option for peppercorn rent? I wouldn't consider a leasehold with anything other than peppercorn rent which in practice means no rent is payable. The statutory process gives you that.

Yes, the statutory process gives you that, and I have started that process by serving the statutory notice. The thing is though, the statutory process can take quite a long time (my solicitor said expect no less than 6 months, but possibly as long as 18 months from start to finish), and I want to move. Also, the statutory process is certain to cost me more upfront - quite possibly a lot more if I have to take the process all the way to tribunal, which I very possibly might have to (my freeholder is apparently notorious for making the process very difficult).

So whilst proceding with the statutory process is an option, it's not necessarily the best option if I want to sell quickly.

wwarby

HouseBuyer77 wrote: »

Did the surveyor say which options would make it unmortgageable? Going the statuatory route may well be a better long-term deal but as you're looking to sell ASAP you probably don't care. What were the renewal costs associated ground rent costs with each option?

I think the doubling clause is often one the lenders dislike. However as it's only every 20 years it's not much different from the RPI related ones (other than less frequent increases).

The surveyor had only had a quick glance at the options when I spoke to him and is going to come back to me later this week with a proper assessment of the offer. The landlord gave me 16 different options (perhaps in an attempt to confuse me!) I guess there's no harm listing them here (all 125 year lease length)

Ground rent £250, increase by RPI every 5 years: £3500
Ground rent £250, increase by RPI every 10 years: £4000
Ground rent £250, doubling every 20 years: £4500
Ground rent £250, increase by starting rent every 10 years (capped at 5th): £3250
Ground rent £300, increase by RPI every 5 years: £2600
Ground rent £300, increase by RPI every 10 years: £3200
Ground rent £300, doubling every 20 years: £3800
Ground rent £300, increase by starting rent every 10 years (capped at 5th): £2300
Ground rent £350, increase by RPI every 5 years: £1700
Ground rent £350, increase by RPI every 10 years: £2400
Ground rent £350, doubling every 20 years: £3100
Ground rent £350, increase by starting rent every 10 years (capped at 5th): £1350
Ground rent £400, increase by RPI every 5 years: £800
Ground rent £400, increase by RPI every 10 years: £1600
Ground rent £400, doubling every 20 years: £2400
Ground rent £400, increase by starting rent every 10 years (capped at 5th): £400

I wrote to the freeholder today and suffice to say he is willing to hear a counter offer from me, so there is definitely room for negotation yet. I have served the statutory notice with a request for a 90 year extension and peppercorn rent for £5000, so obviously all the options proposed are cheaper than that initial offer. I had in mind that I might counter with something like:

Ground rent £150, increase by RPI every 10 years: £3000

That would still be way better for the freeholder than the statutory peppercorn rent.

HappyMJ

wwarby wrote: »

Yes, the statutory process gives you that, and I have started that process by serving the statutory notice. The thing is though, the statutory process can take quite a long time (my solicitor said expect no less than 6 months, but possibly as long as 18 months from start to finish), and I want to move. Also, the statutory process is certain to cost me more upfront - quite possibly a lot more if I have to take the process all the way to tribunal, which I very possibly might have to (my freeholder is apparently notorious for making the process very difficult).

So whilst proceding with the statutory process is an option, it's not necessarily the best option if I want to sell quickly.

Yes it costs more upfront but it makes the value of your property almost the same as a freehold property.

As I said I wouldn't even look at your property if it had any amount of ground rent so you've limited your market.

I don't want to go through the hassle of owning it for 2 years then spending up to 18 months to go through the statutory process and it will cost thousands even though you've just extended. I'll deduct that cost from the freehold value of the property before making my offer. The more people interested in your property the more you'll get for it.

You've got just a bit more than 80 years left on your lease so now is the best time to extend using the statutory process.

ognum

I did a voluntary lease extension on a property I own and agreed a peppercorn rent for a very slightly larger cost. It took about 6 weeks for it all to go through.

wwarby

HappyMJ wrote: »

Yes it costs more upfront but it makes the value of your property almost the same as a freehold property.

As I said I wouldn't even look at your property if it had any amount of ground rent so you've limited your market.

I don't want to go through the hassle of owning it for 2 years then spending up to 18 months to go through the statutory process and it will cost thousands even though you've just extended. I'll deduct that cost from the freehold value of the property before making my offer. The more people interested in your property the more you'll get for it.

You've got just a bit more than 80 years left on your lease so now is the best time to extend using the statutory process.

Sure - everything you've said is valid and none of that is lost on me at all - I appreciate the advice. Where I'm coming from though is that if I renew it to 125 years with a ground rent that is tolerable, it wouldn't necessarily be the next owner's problem to go through the statutory process or the next few owners after that.

Providing the ground rent remains tolerable (which is key), it shouldn't become a major concern for buyers in the next 30 years. If I was a buyer and the ground rent was relatively low (say, £200 or less) and I knew it was going to remain that low (relative to inflation) and the years remaining were going to remain high when I came to sell it, that's all I'd be worried about. There are very few flats in my area with a peppercorn rent, and if the estate agents are to be believed (is that a contradiction in terms?) demand in the area for flats greatly exceeds supply so I suspect most buyers won't have the luxury of ruling out ground rented properties.

Bottom line is I don't really want to wait for the statutory process to run it's long and winding course if I don't really have to. If a deal with the freeholder reduces the value of the property by a few grand, that's probably worth it to me. If that deal would likely cause me to get buyers pulling out of the sale once their solicitors read the ground rent terms, that's what I want to avoid at all costs.

wwarby

ognum wrote: »

I did a voluntary lease extension on a property I own and agreed a peppercorn rent for a very slightly larger cost. It took about 6 weeks for it all to go through.

Sounds like you had the most reasonable freeholder in the world! The first offer my freeholder made me was adding 18 years to the lease (back to 99) for £11,500 with a £350 ground rent that doubles every 10 years. My freeholder is notorious for playing dirty tricks like claiming they never received the statutory notice or finding a typo on it 3 hours before the 2 month response period ends. They apparently try to derail the process in order to force you to wait a year before you're allowed to try again. There's no way my freeholder is going to be as reasonable as yours!

HappyMJ

If you do extend to 125 years it will certainly be mortgageable with any of the options you've been given. The value of the property will be valued based on the amount of the ground rent due which may affect the buyers ability to buy based on affordability. If you make it clear in the particulars what ground rent is due each year that should filter out the buyers not willing to pay a ground rent from even viewing the property and prevent buyers from pulling out at a later date.

It'll be 45 years until it'll be difficult to remortgage and by then it's someone else's problem.

Isn't there an option where you can start the statutory process and assign that to the purchasers of your property? The buyers can pay the value of the property based on the process being completed and you pay the lease extension costs from the funds your solicitor will hold from the sale of the property. I'd seek legal advice on this one. You can sell with the 81 years remaining at full value.