Ground Rent increases. Help needed!

thatkears

Hi all,

You may have seen the article on ITV news this week about people who've bought houses with an agreed ground rent. only to find this doubles every 10 years, meaning they are struggling to sell their properties due to the future ground rent being prohibitively expensive.

We are in the process of buying a new build, and in the contract it states that the ground rent will be reviewed every 10 years, and if it is increased it will do so in line with the following calculation:

Initial rent (£200 pa) * RPI Value / Base Value

The kicke in this is what the 'base value' will be, as this value will end up being the difference between a reasonable increase and basically an absolute rip off.

Can anyone advise on what the Base Value will be, I expect it will either be:

100 (starting value of the RPI from 1987)
OR
RPI value from when we sign the contract (265.5 as of Jan 2017)?

I've done some maths and have come up with the following calculations for the increase we could expect in 2017 should it be the 2nd option:

Initial rent = 200
RPI Value = 335 (educated guess, current rate is 265.5, RPI increased about 70 points from Jan 2007 - Jan 2017)
Base Value = 265.5 (RPI now, when contract signed (FYI we haven't signed yet because of this issue))

200 * 335= 67000

67000/265.5=252.35

So new ground rent would be 252.35, an increase of about 25%, or 2.5% a year (which is roughly speaking the % RPI increases per year)

Is this correct?

Using 100 as the base figure means the ground rent would go up to a whopping 600 odd quid after 10 years, which would mean we'd have to pull out, this is unacceptably high, and also a pretty vile trick to rinse people out of more money.

Hope this isn't too much waffle!!!

k3lvc

thatkears wrote: »

Using 100 as the base figure means the ground rent would go up to a whopping 600 odd quid after 10 years, which would mean we'd have to pull out, this is unacceptably high, and also a pretty vile trick to rinse people out of more money.

Don't know re your calculations but are you sure you'd pull out over a potential increase to £600 in 10yrs time ?

It's all part of the uncertainty (or in this case certainty) of buying a property and a single move in interest rates could cost you more than that in a year

moneyistooshorttomention

So the house is leasehold - rather than freehold??

Is it possible to say you will only be proceeding with the purchase if it's down there in writing that you can buy the freehold (at a reasonable price - specified what that means) within the first year and make that apply (no matter who owns the leasehold) - ie in case they sell these leases onto another company?

thatkears

Yes it's a leasehold.

I have asked the solicitor for clarification on the rent increase calculation, and also if it possible to buy the freehold now as part of the purchase.

Have seen stories about how people have ended up stuck with properties they can't sell as the ground rent increases at a stupid rate after 40/50 years or so, then they look to buy the freehold but this has been sold on to another property company who charge through the nose for it.

I do think the whole thing is pretty horrible, there's been enough stress and scratching around to get the deposit together without this nonsense!

davidmcn

Being indexed to RPI means it increases in line with inflation - nothing to do with when the index was re-based in 1987.

Of course, the general rate of inflation might not reflect property inflation, but it's almost certainly a better way of doing it than having the increase fixed as x2 or whatever.

thatkears

The issue is that it would go up from there every 10 years, so as we get older the ground rent increases. It would also make the property difficult to sell as solicitors will advise against signing into a ground rent agreement that can spiral higher and higher.

It's a subtle trick that's being pulled as you don't instantly think the fee is that high, but i can eventually manifest to a massive payment.

And also, 600 quid for ABSOLUTELY NOTHING is very annoying!

Miss_Samantha

The base value must be defined in the lease otherwise the formula cannot be used. Logically it should the RPI value for the month the lease was created, or the month before.

davidmcn

thatkears wrote: »

The issue is that it would go up from there every 10 years, so as we get older the ground rent increases.

Most things increase in price as the years go on - is there a reason why your ground rent ought to be fixed at 2017 prices?

It would also make the property difficult to sell as solicitors will advise against signing into a ground rent agreement that can spiral higher and higher.

Increasing in line with inflation is only "spiralling higher and higher" if everything else is (on average) also spiralling higher and higher.

It's a subtle trick that's being pulled as you don't instantly think the fee is that high, but i can eventually manifest to a massive payment.

Unlikely to be "massive" relative to the value of your property.

And also, 600 quid for ABSOLUTELY NOTHING is very annoying!

It's not absolutely nothing, it's the price you're paying for renting the landlord's ground (and having the property value discounted to reflect that).

G_M

thatkears wrote: »

The issue is that it would go up from there every 10 years, so as [STRIKE]we get older [/STRIKE]the ground rent increases

as time passes and inflation erodes the value of the pound.

Once you have verified the calculation (your solicitor should do this - sorry I can't) you'll have 4 choices

1) accept the terms and purchase the existing lease
2) renegotiate the terms of the lease if it's a brand new one (probobly not possible)
3) walk away
4) buy the freehold with the lease (and then remove the lease)
5) negotiate a fixed price for the purchase of the freehold to follow later

see? that's why I can't do the calculation. Can't even count beyond 4.

maisie_cat

Please do not buy a leasehold house, you will regret it because when you want to buy the freehold you will find that it will cost a small fortune

thatkears

Option 5 (of 4!) sounds like a good idea, will definitely discuss this with the solicitors.