Leasehold in London: What do you think of this ground rent clause?

SeekingSomeAdvice

Hi all,

I regularly visit this forum to get financial advice, so I would like to thank everyone for the help over the years!This is the first time I have posted a question; one which will hopefully be useful for others too.

We're first time buyers, looking to buy in London. We put in an offer on a flat, which has been accepted. However, this is the clause regarding ground rent:

"With effect from each Review Date the Ground Rent shall be increased to the greater of:

(1) the Ground Rent payable immediately prior to the Review Date multiplied by 150%; and
(2) the Ground Rent payable immediately prior to the Review Date multiplied by the RPI published for the October before that Review Date and divided by the RPI published for the October before the previous Review Date."

The review dates are 10 years apart, I believe the next one is in 9 years (will find out before buying!). The ground rent is currently £375, and if I understand this clause, this means that the ground rent will increase at least 150%, therefore to £562; 844; 1265, etc...

To me, this looks pretty bad - the scandal which broke recently warns about ground rents doubling and this looks like it will more than double! Obviously, we are talking to our solicitor and our financial advisor says he does not think that would affect the price of a property in London, but I'd love to hear what this community thinks.

1. Is this deal particularly bad news, in your opinion, or fairly standard for London?
2. We can afford the increase, but we cannot afford for the clause to negatively affect the value of our property. Is this likely?
3. Is it ever possible to negotiate the ground rent clause if buying from another leaseholder rather than the developer/landlord directly?
4. We cannot afford a freehold property in London on our budget. Is this our only choice or have others come across better options in London?

Thanks for your time and help!

Nervous first-time buyers

Smi1er

So in 9 years it will be £375 *1.5+increase in RPI, so using todays rates thats in 2027 increase to £580, In 2037 £897

:rotfl:

Sorry but I'd be giving that one a miss.

Ground rent is written in the lease, they're not going to rewrite the lease for you.

bouicca21

I think that's an either or rather than both, but in any case review at 10 year intervals is unreasonable and I suspect might be difficult to mortgage. Unless it's a luxury pad the ground rent is already high.

There are plenty of flats in London with better ground rent clauses - mine is one of them.

Slithery

SeekingSomeAdvice wrote: »

To me, this looks pretty bad - the scandal which broke recently warns about ground rents doubling and this looks like it will more than double!

If a ground rent doubles then it would be 200% of the previous value whereas yours would be around 150% so not as bad. The 10 year period still makes this unattractive though.

csgohan4

I would walk, makes it difficult to sell on later too

AdrianC

SeekingSomeAdvice wrote: »

"With effect from each Review Date the Ground Rent shall be increased to the greater of:

(1) the Ground Rent payable immediately prior to the Review Date multiplied by 150%; and
(2) the Ground Rent payable immediately prior to the Review Date multiplied by the RPI published for the October before that Review Date and divided by the RPI published for the October before the previous Review Date."


The review dates are 10 years apart

So if we look at the last 10 year period...
RPI October 2007 = 208.9
RPI October 2017 = 275.3
So option 2 would see the ground rent increase by 31.8% due to inflation. That's less than 50%, so option 1 would apply.

To me, this looks pretty bad - the scandal which broke recently warns about ground rents doubling and this looks like it will more than double!

Umm, no.
+50% is a lot less than "doubling", which is +100%.


Your £375 would become £562.50 under option 1, would have become £494.25 under option 2, but would become £750 under a doubling clause.

3. Is it ever possible to negotiate the ground rent clause if buying from another leaseholder rather than the developer/landlord directly?

No. The ground rent increase is specified in the lease, and you can only negotiate the lease with the freeholder (or head-leaseholder).

4. We cannot afford a freehold property in London on our budget. Is this our only choice or have others come across better options in London?

Other leasehold properties will have different increases. Anything below RPI is going to be exceptional. +50% every decade is equivalent to annual average RPI of a tidge over 4%. Anything over that, and yours will increase by RPI (as the greater of the two options).


Your other option would be to go for a statutory extension of the lease once you've lived there two years - that would take the ground rent down to peppercorn, but WILL cost you. You don't say how long the current lease is, or what the value of the flat is, but if we guess at £250k and 100yrs to go, then statutory extension would likely cost £10k+ (The usual calculator - https://www.lease-advice.org/calculator/ - reckons £6-9k, but that doesn't account for ground rent increases), and you would be liable for both sides legal costs.

SeekingSomeAdvice

bouicca21 wrote: »

I think that's an either or rather than both, but in any case review at 10 year intervals is unreasonable and I suspect might be difficult to mortgage. Unless it's a luxury pad the ground rent is already high.

There are plenty of flats in London with better ground rent clauses - mine is one of them.

Thank you, Boudicca. Agree that it is either or, whichever squeezes most out of us obviously!.

May I ask what your ground rent clause says, roughly, to get a sense of a good one?

burtbot1

If you're interested in an ex-local authority building, the ground rent are super cheap! Ours in a tenner a year....

Plus if you get one in a smallish block with no lift (ours is a block of 24) then the service charges are also really cheap and really reasonable. Ours in £800 a year, but we a get a refund of around 10-20% each year as they always overestimate costs.

bouicca21

I didn't say it was good just better. Mine is £250 for a 3 bed flat built in the mid 60s. It doubles at 30 and 60 years, then stays the same for the remaining 80 years.

tomintoul91

Also worth being wary of the "AST trap" if ground rent has the potential to exceed £250 (or £1000 in London) during the course of the lease. Gives the landlord pretty draconian powers to forfeit the lease, and I'm finding banks will be hesitant to lend.

Helpful Mishcon de Reya article which I'm not able to link. Search "mishcon de reya assured tenancy traps" and its the top result.

AdrianC

tomintoul91 wrote: »

Also worth being wary of the "AST trap" if ground rent has the potential to exceed £250 (or £1000 in London) during the course of the lease. Gives the [STRIKE]landlord[/STRIKE] freeholder pretty draconian powers to forfeit the lease, and I'm finding banks will be hesitant to lend.

Helpful Mishcon de Reya article which I'm not able to link. Search "mishcon de reya assured tenancy traps" and its the top result.

https://www.mishcon.com/news/publications/real_insights_-_property_update_05_2017/assured_tenancy_traps__the_unexpected_ast_05_2017


This gives a bit more detail:
https://www.howespercival.com/articles/when-is-a-long-lease-not-a-long-lease-when-its-an-assured-shorthold-tenancy/
...and the relevant bit of legislation appears to be not the Housing Act 1988, but s186 of the Local Government and Housing Act 1989
http://www.legislation.gov.uk/ukpga/1989/42/section/186
...together with Schedule 10 of that act and Schedule 1 of the Housing Act 1988.


I leave it for others with far more legal brains than me to interpret the detail, but I'm not seeing this magic £1k/£250 figure anywhere there.