Leasehold / Ground Rent

cianelectric

Hi there, I have a leasehold flat that I’m trying to sell at the moment. It’s been marketed by the estate agent at £250k and I’ve accepted an offer near that.

The buyer has a mortgage approved with HSBC. The estate agent has all along been cautious of the ground rent clause in my lease - it starts at £250 and then goes up by £250 every 10 years. We have just passed the first increase so it is now £500 / year.

The estate agent has talked to the buyer on this, and the buyer has now said that HSBC won’t lend on it and they are looking for a new lender. My mortgage is with natwest and I’ve had it since 2013 with them and never had an issue from them concerning ground rent.

I know that ground rents doubling are an issue, but is the kind of increase I have seen as unpalatable by many mainstream lenders?! My concern is that it hasn’t been expkainedcorrectly to the buyer or their lender by my estate agent and they may have mistakenly thought that it doubles each decade.

Any advice or past experience on this topic appreciated!

Tom99

[FONT=Verdana, sans-serif]Make sure this and any purchaser has the correct details, maybe a copy of the lease review clause.[/FONT]
[FONT=Verdana, sans-serif]Have you owned the flat for 2 years? If so you could buy out the ground rent, reduce it to £0 and extend the lease by 90, using the statutory lease extension process.[/FONT]
[FONT=Verdana, sans-serif]That will come at a price of course, maybe £12,000-£15,000 for the ground rent then something for the reversion and both sides costs on top.[/FONT]
[FONT=Verdana, sans-serif]That would all take time, probably a min of 6mths but what you can also do is serve the Section 42 Notice now and assign that notice to a purchaser who then takes the lease extension forward.[/FONT]

Mokka

In my opinion it looks like HSBC mistook your ground rent for the doubling one- flats with this type of ground rents are now unmortgageable. Section 42 notice might be a solution. Your buyers should point out the ground rent issue right from the start to the mortgage company- this should save them nasty surprises. Ground rent is a waste of money, but in 100 years time £2500 might be less than £250 + inflation.

SmashedAvacado

I have had a quick look at this because i think the buyer's lawyer has got this wrong. HSBC's position, as set out in the CML handbook (as at 2 August 2018) is that

"5.14.9 We have no objection to a lease which contains provision for a periodic increase of the ground rent provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable. If you consider any increase in the ground rent may materially affect the value of the property, you must report this to us (see part 2)"

So it appears that the lawyer has considered that such an increase will "materially affect the value". I am not sure how they could come to such a conclusion because the increase isnt particularly high. This conclusion has been made by the lawyers acting for the buyer, not HSBC - as it didnt even need referring to the bank unless they believed it was an issue. I would be asking via your lawyer for the buyer's lawyer to explain to your lawyer how they reached this conclusion.

davidmcn

SmashedAvacado wrote: »

I have had a quick look at this because i think the buyer's lawyer has got this wrong. HSBC's position, as set out in the CML handbook (as at 2 August 2018) is that

"5.14.9 We have no objection to a lease which contains provision for a periodic increase of the ground rent provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable. If you consider any increase in the ground rent may materially affect the value of the property, you must report this to us (see part 2)"

So it appears that the lawyer has considered that such an increase will "materially affect the value". I am not sure how they could come to such a conclusion because the increase isnt particularly high. This conclusion has been made by the lawyers acting for the buyer, not HSBC - as it didnt even need referring to the bank unless they believed it was an issue. I would be asking via your lawyer for the buyer's lawyer to explain to your lawyer how they reached this conclusion.

It's not clear from the OP that it has actually been through the buyer's lawyer rather than the estate agent. Possible that the buyer has spoken directly to the bank and something has been lost in translation? I agree it should be the solicitors sorting it out.

cianelectric

David you are right, it hasn’t gone to solicitors yet. Offer accepted on Saturday. My estate agent has highlighted the ground rent, I think because they were burned in past with a doubling one that fell through. Buyer spoken to HSBC. My concern was it may have been lost in translation.

bouicca21

I'm a bit taken aback at the view that adding £250 every 10 years isn't unduly high. It's better than doubling every 10 years but imho still unreasonable. I'm not surprised that it might be difficult to get a mortgage.

cianelectric

Hi, I agree it’s not ideal.

However if you model it over 100 years the total amount paid is less than if it went up 3% (circa inflation) annually.

I take the point though that it’s questionable whether ground rent should be subject to inflation / indexation at all.

bouicca21

If I were a prospective buyer I'd not be thinking about 100 years, but about the £500 now and the £750 in less than 10 years time.

How does the ground rent relate to the value of the property? My ground rent represents something in the order of 0.06% of the capital value of my flat. In 55 years time after 2 increases, if the capital value of the flat remains the same, the increased ground rent would still only be 0.25% of the capital value. And that's on a recently renewed lease in London.

cianelectric

It’s 0.2% at the moment. But will stay at that for the next decade if the value of the flat stays the same.

If the value of the flat goes up 2% each year then it varies over the next 50 years between 0.14 and 0.22%. If the property value didn’t increase over the next 50 years then it would get to 0.6% over that timeframe.