Ground rent is 1/1000 of capital value after 90 years

shad7

Hello. I am currently in a process of buying a flat in London and I've just got hold of the Lease. The lease is 999 years, but it contains a clause of ground rent doubling every 15 years. Initial ground rent is £300. The doubling stops after it's been doubled 5 times and after that (90 years into the lease) the ground rent will be 1/1000 of property capital value.

I think the doubling is not that bad since the discounted cash flow for those 90 years is about £15k-£19k which is fine with me considering the property price is below the market. What bothers me is the 1/1000 condition, because I have no idea how it may affect the sale of this property in future (say in 5-10 years).

Would you consider buying such a property or would it scare you away? How common is this 1/1000 ground rent clause? Is there a way to assess having such a clause in the Lease?

Any thoughts and opinions are highly appreciated. Thanks.

bouicca21

How would 1/1000 of current value relate to current ground rent?

Will your mortgage company accept doubling every 15 years?

foxy-stoat

bouicca21 wrote: »

How would 1/1000 of current value relate to current ground rent?

Will your mortgage company accept doubling every 15 years?

No reason why not as the ground rent will go from £300 to £600 after 15 years and the next double will be £1200 but the mortgage may well be paid off before then....the sums of money are fairly small in property ownership.

eddddy

shad7 wrote: »

The lease is 999 years, but it contains a clause of ground rent doubling every 15 years. Initial ground rent is £300. The doubling stops after it's been doubled 5 times and after that (90 years into the lease) the ground rent will be 1/1000 of property capital value.

This may be a problem for some mortgage lenders.

For example, Nationwide (and a number of others) say

However, unreasonable multipliers of ground rent will not be permitted, for example, doubling every 5, 10 or 15 years. These must be referred to us and we will advise if our mortgage offer remains valid.

Link: https://www.cml.org.uk/lenders-handbook/englandandwales/question-list/1852/

It may be acceptable in this case, because the doubling stops after 90 years, but assuming you find a lender who is prepared to lend, when you eventually sell, it may still be a cause for concern for some buyers.

shad7

bouicca21 wrote: »

How would 1/1000 of current value relate to current ground rent?

It wouldn't. But it will determine the ground rent in 90 years. And as it is obviously worse than having peppercorn rent I wonder how that affects the price.

bouicca21 wrote: »

Will your mortgage company accept doubling every 15 years?

I don't know at this point. I haven't heard of my lender being against doubling, but it might be.

westernpromise

It would mean a million quid property had a £1,000 ground rent. At present any such property would probably have a council tax of at least twice that, so while it's as you say not peppercorn, neither is it off-the-scale silly.

bouicca21

I think we really need to know the starting value. If this property is currently worth 5 million, then the answer to whether it's 'off the grid silly' is very different to a property currently worth 500k.

Also I think prospective purchasers are more likely to worry about the doubling ground rent than what will be payable in year 90.

shad7

Sorry forgot to mention. The price is £600k.

westernpromise

So if this charge is actually £300 today, and the price is £600k, in ball park terms it's 1/2,000th of value today, roughly roughly, and rises to 1/1,000 after 90 years. Doesn't seem that outrageous. As the OP notes, the DCF value is about £19k, so it's a way of making a £619k asking price look like a £600k asking price.

Tom99

[FONT=Verdana, sans-serif]You can buy out the ground rent in two years time if you are bothered about it, or if the vendor has owned the flat for more than two years they can serve a notice now and assign the notice to you to complete the buy out.[/FONT]

martinlewisjunior

Tom99 wrote: »

[FONT=Verdana, sans-serif]You can buy out the ground rent in two years time if you are bothered about it, or if the vendor has owned the flat for more than two years they can serve a notice now and assign the notice to you to complete the buy out.[/FONT]

Wait...I didn't realise you could buy out your ground rent? I thought you could only Extend your lease (Stat route)which then removes the ground rent?