Just been offered to change my ground rent doubling clause which happens every 15 years to inflation

pinkfloyd198

I have Just been offered by my freeholders to change my ground rent doubling clause in my lease which happens every 15 years to change by retail price index (I believe its the same as inflation) instead.

This is a new thing so although it makes common sense for me to do this, just double checking to make sure its a good idea?

Comms69

Well inflation is not going to be in effect 100% in 15 years, so yes it seems to be a good deal.


BUT if you're planning to move in 5 years, then you'll pay more.
BUT if you do move your buyers might appreciate the savings going forwards...


Basically do the maths and see what you feel is best

eddddy

Are your freeholders asking you to pay for this?

AdrianC

RPI is one of the two ways to calculate inflation - CPI (Consumer Price Index) is the other. They're basically calculated from different baskets of goods.


RPI for July 2018 was 281.7
RPI for July 2003 was 181.3
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/chaw/mm23

So over the last 15 years, if your ground rent was £100/year in 2003, it would be £155.38 today growing on RPI, but £200 today on double-every-15-years.

Sounds like a no-brainer, right? But it's not quite that simple...
For the last 14 years months, you'd have been paying £100. A total of £1,400.
If you average out the RPI annual increases over that time, they work out to about £128/year - so over 14 years, you'd have paid nearly £1,800 total...


It all depends on where in the 15 year timescale you think you're going to sell the place, and stop paying the ground rent, as to whether you'll be better off. Then there's the perception question - a potential future buyer may be more scared of the concept of "doubling every 15 years" than a small annual increase.


Oh, and what's going to happen to inflation in the future...?

eddddy

pinkfloyd198 wrote: »

I have Just been offered by my freeholders to change my ground rent doubling clause in my lease which happens every 15 years to change by retail price index (I believe its the same as inflation) instead.

Here's a fairly compelling reason to change...

Nationwide (and some other mortgage lenders) say:

Ground rent and other event fees must be reasonable at all times during the lease term. For example, it is acceptable for ground rent escalation to be linked to RPI (Retail Price Index) or a similar index and where this is the case we do not need to be advised. 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. If you are unsure as to whether the terms of a lease are unreasonable, please refer the details to us.

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

So when you decide to sell... buyers may find it hard to get a mortgage, if the ground rent doubles every 15 years.

(Although lending criteria may change over future years - either becoming harsher or softer.)

SmashedAvacado

it is highly likely the government are going to legislate to stop ground rent increases like this (the ones that double). These properties have a real issue because it impacts value to have such a high outgoing. Your freeholder is being canny by proposing something that is unlikely to be outlawed. This way at least the ground rent will go up by a bit for them which is better than the potential alternative that it never goes up (which could be the result of the law changes). The law changes are not confirmed yet but it is pretty certain that there will be a change.

pinkfloyd198

oh so you're saying if i wait, government might fix the doubling and keep the rent constant , but if i sign a new one, they might not be able to do anything about that?

SmashedAvacado

yes - that is what i am saying

they are gambling on the government outlawing what you have at the moment but not outlawing RPI. If they outlaw what you have at the moment, the rule might be no increase ever.

i woudl take the deal if it was me - we have a lot of political uncertainty and if you need to sell in the meantime, the deal you have is not one that many buyers would want. You could ask for a sweetner - you will agree but they pay your legal costs - it is likely you will need lender consent for this

bouicca21

Is the idea that it will go up by rpi annually or that rpi will be the basis for a recalculation at 15 year intervals?

bigstevex

^ Same question.


Also, why not buy the freehold? Did they make that offer?

Tom99

SmashedAvacado wrote: »

it is highly likely the government are going to legislate to stop ground rent increases like this (the ones that double). These properties have a real issue because it impacts value to have such a high outgoing. Your freeholder is being canny by proposing something that is unlikely to be outlawed. This way at least the ground rent will go up by a bit for them which is better than the potential alternative that it never goes up (which could be the result of the law changes). The law changes are not confirmed yet but it is pretty certain that there will be a change.

[FONT=Verdana, sans-serif]I think its very unlikely the government will enforce new rules on existing leases with no compensation for the landlord, which is what you are suggesting might happen.[/FONT]
[FONT=Verdana, sans-serif]The tenant already has a right to compel the landlord to reduce the ground rent to £0 at a fair price and I can't see that changing much. Maybe some statutory factors will be produce to remove some of the valuation variables, a formula for how to value doubling or RPI increases for example.[/FONT]