Ground rent clarification.

Skynet5

Hi all.. quick question on understanding some lease clause around rent.

"The sum of two hundred and thirty pounds per annum until the 25th anniversary of the date hereof and from the expiration of such period and from the expiration of each successive period of Twenty Five years thereafter such sum increased by the sum of £20 more than that payable in the immediatly preceeding period of twenty five years."

So to me this means :
1-25 years £230
26-50 years £250
51-75 years £270

Is that right?

anselld

1-25 years £230
26-50 years £480
51-75 years £980

Read carefully...
(increased by) (the sum of £20 more than previous)

Skynet5

Ahh. Ok. Clearly worse than I thought, not sure if this is a bad place to be. Lease started in 2007, so first jump in 2032.

I know doubling every 10years is crippling.

anselld

Skynet5 wrote: »

Ahh. Ok. Clearly worse than I thought, not sure if this is a bad place to be. Lease started in 2007, so first jump in 2032.

I know doubling every 10years is crippling.

There are a lot worse! Doubling every 25 years equates to 2.8% annual inflation. This is only slightly higher with the extra £20 (3% for the first period).

Not ideal, but not horrendous.

Skynet5

So doing some sums my lease doesn't look onerous....Looking at the scandal of the current leases that double every 10 years these basically screw you immediately, as within a couple of decades your rent is way above inflation and still going up at 7%, making the property likely half what it is worse? Not sure about that...as people had been offer 50k to buy the freehold.

My lease is a 999year one, for arguments sake if the TayWim ones are 999year (I believe they were 250) they look less onerous into the far future as the multiplier stops after 50 years, where as mine does not. It is about year 200 when I'm paying ground rent (in theory) at the same level I am now, but the TayWim ones gradually become peppercorn. At this point we've both paid the same about of money. Mine is still going up, theirs hasn't changed for the last 150 (but they paid a load previously during the high inflation periods of their ground rent).

If inflation didn't consistently average out at 2.9% within a given period mine could easily become onerous mid way through the term. I imagine we'll have some long periods of low inflation over the next 1000 years.

Of course this is 200+ years away and it wont matter to me or my children's children's ...children.

I'm sure its complex, but is there a rule of thumb for working out what the freehold *should* be to buy when the lease is 999 and rent doubles every 25 years?

I understand I could :

• buy the freehold at some calculation (typically how is this calculated?)
• request to extend the lease and have ground rent put to zero (but pay a premium, how is this calculated?)

Does anyone have a general formula (spreadsheet for either of these calculations)?


My doubler doesnt concern me, so maybe I don't care...but interested to know if I should care materially (I signed up for it after all) and what my likely options are?

Tom99

Skynet5 wrote: »

So doing some sums this doesn't look onerous.

Looking at the scandal of the current leases that double every 10 years these basically screw you immediately, as within a couple of decades your rent is way above inflation and still going up at 7%, making the property is basically worthless.

My lease is a 999year one, for arguments sake if the TayWim ones are 999year (I believe they were 250) they look less onerous into the far future as the multiplier stops after 50 years, where as mine does not.

If inflation didn't consistently average out at 2.9 within a given period mine could easily become onerous mid way through the term.

Of course this is 200+ years away and it wont matter to me or my children's children's ...children.

I'm sure its complex, but is there a rule of thumb for working out what the freehold *should* be to buy when the lease is 999 and rent doubles every 25 years?

I understand I could :
buy the freehold at some calculation
request to extend the lease and have ground rent put to zero (but pay a premium)

Does anyone have a general formula (spreadsheet for either of these calculations)?

My doubler doesnt concern me, so maybe I don't care...but interested to know if I should care materially (I signed up for it after all) and what my likely options are?

Since you can forecast your ground rent for the next 999yrs then, in theory at least, you would just discount each years rent at an appropriate rate, say 7%pa. Since you are discounting at a higher rate than the rent is increasing you will arrive at a finite mathematical answer.
However you are required to pay the market value to the freeholder and you do have to question whether rent in say 150+yrs time is worth anything at all no matter how much the maths might say it ought to be worth.
Say I offered to pay you £1bn in 150yrs time, how much would you pay me now? You, your children and your grandchildren are not going to see that money so the answer might be £0.

anselld

Tom99 wrote: »

Since you can forecast your ground rent for the next 999yrs then, in theory at least, you would just discount each years rent at an appropriate rate, say 7%pa. Since you are discounting at a higher rate than the rent is increasing you will arrive at a finite mathematical answer.
However you are required to pay the market value to the freeholder and you do have to question whether rent in say 150+yrs time is worth anything at all no matter how much the maths might say it ought to be worth.
Say I offered to pay you £1bn in 150yrs time, how much would you pay me now? You, your children and your grandchildren are not going to see that money so the answer might be £0.

It is an interesting point, but how would the Tribunal see it for a determination?

I don't know the answer, I am genuinely interested as I had a similar problem recently. Would they use a net present value calculation at some discount rate as you have suggested? If so what rate?

Skynet5

Thanks for the reply Tom. I'm trying to understand what you mean, and struggling :-(

What you mentioned about 7%pa ... that is the capitalisation rate correct? I'm read about that and didn't really understand it.

I'm just trying to understand how the Freeholders would place a value on it now. Or do they just randomly come up with a number?

Mentally if I shove 20k into an investment...say a FTSE100 EFT for 999years and it makes only a meagre 3% each year on average...

In the 998th year I'll make:
£5,897,688,568,470,880.00 interest.

My ground rent, each year, for the last 25 years is:
£82,463,372,083,200.00

So makes the ground rent look like peanuts...based on me deciding to invest 20k now.

So with financial forecasts, historic values etc....I don't see a problem for the duration of the lease (all 999 years of it).

Skynet5

I'm glad you know what he is on about :-)

Tom99

Skynet5 wrote: »

What you mentioned about 7%pa ... that is the capitalisation rate correct? I'm read about that and didn't really understand it.

£1 due in 1yrs time is worth 7% less than £1 now so £1/1.07=93.46p

Skynet5

ah so £1 due in 999 years is worth x% less than £1 now.

How would I understand what % to use? I presume the percentage would be different for each year?