Solicitor unhappy with escalating ground rent - help!

Tom99

You have 110yrs left on the lease. If you bought out the ground rent now the likely cost of the ground rent element would be:
- if discounted at 6%pa = c £3,400/£3,500
- if discounted at 6.6%pa = c £3,000/£3,100
- if discounted at 7%pa = c £2,650/£2,750
You will have the value of the reversion and fees to pay on top but the total amount is still relatively modest compared to the sort of bill for shorter lease.
If the proposed changed to the lease extension process come about you may find the final bill to be even less.

TrickyDicky101

anselld wrote: »

Not precisely, no. The actual equivalent rate would be slightly less than 2.8% but for the purposes of deciding if it is onerous or not it is a close approximation.

I decided to calculate what impact this has on the actual rate of return as I (mistakenly as it turns out) thought it would have greater impact.

Assuming the GR is payable in arrears (ie first GR payment of £100 is 1 year away and there are a further 14 £100s annually thereafter before the doubling kicks in) I make the effective RoR (which is the same as saying the implied inflation rate) is 2.67%.

So this is frankly b*gger all different from the 2.8% you quoted.

Interestingly, if you go back to the very start of the lease when there was 25 years before the GR first doubled, the RoR is 2.27% as there is longer before the doubling kicks in.

This is of course assuming I've got the maths correct!

AnotherJoe

i Think it's mostly your solicitor suffering from CYA or in this case CTA syndrome, they don't want to be sued by you in five years time when you sue them because you've decided that keeping pace with inflation is onerous and unreasonable. .
As is clear there are at least two solutions, one is that it doesn't matter, the other is, that if it does, let's say lenders get more antsy, you can buy it out for a reasonable cost.

Tom99

TrickyDicky101 wrote: »

I decided to calculate what impact this has on the actual rate of return as I (mistakenly as it turns out) thought it would have greater impact.

Assuming the GR is payable in arrears (ie first GR payment of £100 is 1 year away and there are a further 14 £100s annually thereafter before the doubling kicks in) I make the effective RoR (which is the same as saying the implied inflation rate) is 2.67%.

So this is frankly b*gger all different from the 2.8% you quoted.

Interestingly, if you go back to the very start of the lease when there was 25 years before the GR first doubled, the RoR is 2.27% as there is longer before the doubling kicks in.

This is of course assuming I've got the maths correct!

Not sure where you get your 2.27% and 2.67% from but to get from £100 to £200 over 25yrs you inflate at 2.81%pa or over the 10yrs left until the next review at 7.17%pa.

charlie792

I'm just going to throw my hat into the ring.

I don't think the issue here per se is the doubling ground rent but, where a property exceeds £250 ground rent (or £1000 in London) there is a risk it can be classed as an assured tenancy and that under Ground 8 of the Housing Act 1988, if the leaseholder falls into arrears with payment of ground rent, the landlord can technically serve notice to forfeit the lease, in that instance it would mean your mortgage lender would not have any security of their charge.
Whilst that doesn't affect you right now, it might be your solicitor is concerned that it will affect re-sale down the line in the event of repossession (remember they act for the lender as well as you)

anselld

TrickyDicky101 wrote: »

I decided to calculate what impact this has on the actual rate of return as I (mistakenly as it turns out) thought it would have greater impact.
N
Assuming the GR is payable in arrears (ie first GR payment of £100 is 1 year away and there are a further 14 £100s annually thereafter before the doubling kicks in) I make the effective RoR (which is the same as saying the implied inflation rate) is 2.67%.

So this is frankly b*gger all different from the 2.8% you quoted.

Interestingly, if you go back to the very start of the lease when there was 25 years before the GR first doubled, the RoR is 2.27% as there is longer before the doubling kicks in.

This is of course assuming I've got the maths correct!

I agree with 2.3% if starting from day 1.

Tom99

anselld wrote: »

I agree with 2.3% if starting from day 1.

Can you share your calculation?

anselld

Tom99 wrote: »

Can you share your calculation?

Well personally, I was happy with 2^(1/25) which gave 2.8%. I accept that is not mathematically correct, but then I'm an Engineer;).

There may be a much easier way, but I used Excel to ...
(1) Set a schedule of payments for the 125 years doubling every 25
(2) Calculate @NPV of (1) at discount rate X
(3) Set a second schedule of 125 years escalating every year at rate X
(4) Calculate @NPV of (3) at discount rate X
(5) Goal seek rate X to give (2) = (4)

(3) and (4) seem a bit circular so I suspect I have missed a simplification.

Tom99

anselld wrote: »

Well personally, I was happy with 2^(1/25) which gave 2.8%. I accept that is not mathematically correct, but then I'm an Engineer;).

There may be a much easier way, but I used Excel to ...
(1) Set a schedule of payments for the 125 years doubling every 25
(2) Calculate @NPV of (1) at discount rate X
(3) Set a second schedule of 125 years escalating every year at rate X
(4) Calculate @NPV of (3) at discount rate X
(5) Goal seek rate X to give (2) = (4)

(3) and (4) seem a bit circular so I suspect I have missed a simplification.

Yes I can follow your calculation. (4) is always going to be 125x the initial rent because you are inflating the rent annually then discounting at the same rate, so in this case (4) is £12,500 whatever the value of X.
You then find the discount rate you would need to use to make the NPV of £100pa doubling every 25yrs also = £12,500 which, as you say is 2.3%.
However I'm not clear as to what that 2.3% is telling you. Its not the rate at which the rent increases which equated to 2.8%pa, its not a suitable discount rate for valuing the ground rent either.

Kentish_Dave

anselld wrote: »

Well personally, I was happy with 2^(1/25) which gave 2.8%. I accept that is not mathematically correct, but then I'm an Engineer;).

There may be a much easier way, but I used Excel to ...
(1) Set a schedule of payments for the 125 years doubling every 25
(2) Calculate @NPV of (1) at discount rate X
(3) Set a second schedule of 125 years escalating every year at rate X
(4) Calculate @NPV of (3) at discount rate X
(5) Goal seek rate X to give (2) = (4)

(3) and (4) seem a bit circular so I suspect I have missed a simplification.

I think that you are exactly correct.

If you traded an inflation swap at 2.8% for 25 years it’d pay 1.028 to the power of 25, which is 2.

This is how inflation is quoted. An annual rate of 2.8% sees the index doubling every twenty five years.