How much ground rent will buyers bear?

ognum

wwarby wrote: »

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!

I started by finding the surveyor who had done other lease extensions on the building and talking with him. I agreed a fee, £600 from memory and he then negotiated with the freeholder. I then used my own solicitor who has done many transactions for me to complete the process.

As you say I was probably lucky!

wwarby

HappyMJ wrote: »

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.

Yeah, that's kinda what I thought. I think I've heard of that option you mentioned about starting the statutory process and letting the buyer complete it, but to be honest that's the kind of arrangement I'd run a mile from as a buyer - nobody wants to have to deal with that kind of thing just after they've bought a property and I think it would introduce a level of uncertainty and hassle that I would factor in when considering the value of one property against another. All in all I think the property would be more attractive with a 125 year lease and some amount of ground rent attached.

I think I'll make them a counter offer and see if I can get them down a bit from where they are now. Thanks for all the advice

Brown_Eyed_Girl

wwarby wrote: »

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
[STRIKE]Ground rent £300, doubling every 20 years: £3800[/STRIKE]
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
[STRIKE]Ground rent £350, doubling every 20 years: £3100[/STRIKE]
Ground rent £350, increase by starting rent every 10 years (capped at 5th): £1350
[STRIKE]Ground rent £400, increase by RPI every 5 years: £800
Ground rent £400, increase by RPI every 10 years: £1600[/STRIKE]
[STRIKE]Ground rent £400, doubling every 20 years: £2400[/STRIKE]
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.

So there's some above that would be no no for me, although I tend to look at it as a total alongside management fee. doubling every 20yrs sounds ok, but even at the lowest level, £250 it'd look like this

2015 - £250
2035 - £500
2055 - £1000
2075 - £2000

so in 60yrs that 8x as much as now.

Sure it won't hit you or the next few owners but at some point it'll bite. I'm in the process of buying a place that allows for 1/200th of the value. Totally fine in the 80s when written - total pig now if the landlord decided to enact it.

wwarby

Brown_Eyed_Girl wrote: »

So there's some above that would be no no for me, although I tend to look at it as a total alongside management fee. doubling every 20yrs sounds ok, but even at the lowest level, £250 it'd look like this

2015 - £250
2035 - £500
2055 - £1000
2075 - £2000

so in 60yrs that 8x as much as now.

Yeah, that was my immediate reaction too. The thing that you have to remember though is that the value of money changes over time - one article I read said that in £10 in 1973 had the equivalent spending power of over £100 in 2013, which is more than a ten fold increase over 40 years. In other words if RPI keeps pace with historical averages, £250 would become over £2,500 in 40 years - way more than the £1,000 in your calculations.

The thing is though, this is as much about psychology as it is about economics. When you say "increase by RPI", I suspect most people's instinctive reaction is that it seems fair and predictable. When you say "doubles every 20 years" however, my instinctive reaction and those of everyone I've discussed it with is that it sounds like an outrageous and suffocating burden which will spiral out of all control, even though mathematically this perception doesn't stack up at all. I suspect therefore I'd be better off with an RPI-based deal because ultimately buyers aren't going to research historical inflation trends, they are going to go with their gut feeling.

wwarby

So I agreed terms after negotiating back and forth a little. Here's what I got:

+90 years on the lease (so 170 total)
£200 ground rent
Ground rent rises by RPI every 10 years
£4,200 premium for the new lease
£800+VAT for their legal fees

I'm fairly confident that I'll be able to sell relatively easily with that lease in place, and my solicitor has told me to expect it to complete in around 6 weeks, which means I can put it on the market in January and crack on with looking for a bigger place. Thanks to all who offered advice

chappers

Well done sounds like a fair deal, you pay less than the stat, get a reasonable rent below anything else they offered and pay a bit more than the corresponding nearest deal they offered and can move on and sell up.
All sorted nice and quickly.
Can't see a buyer baulking at that.

strawberries1

Brown_Eyed_Girl wrote: »

So there's some above that would be no no for me, although I tend to look at it as a total alongside management fee. doubling every 20yrs sounds ok, but even at the lowest level, £250 it'd look like this

2015 - £250
2035 - £500
2055 - £1000
2075 - £2000

so in 60yrs that 8x as much as now.

Sure it won't hit you or the next few owners but at some point it'll bite. I'm in the process of buying a place that allows for 1/200th of the value. Totally fine in the 80s when written - total pig now if the landlord decided to enact it.

Did you go ahead with the purchase Brown_Eyed_Girl?

I've just found out mine goes up to £4000 for the remainder of the lease!