Solicitor unhappy with escalating ground rent - help!

TrickyDicky101

The issue is that the GR does not increase annually - it is stepped to double after 25 years (from the initial start date).

When you determine the rate as 2^(1/25)-1 = 2.81% you are implicitly assuming GR increases year on year (so 2nd year is £102.81, 3rd year is £105.70, ... etc etc).

So you know with a stepped increase of the type described here it is less than 2.81% (as the 2nd year GR remains £100, 3rd year remains £100 etc etc).

The way I chose to calculate what the rate should be was using the schedule of payments and calculating the IRR on the basis that the outflow of GR each year (out to end of the lease) would be the same value as a flow now (time zero) of remaining years * starting GR (ie £100).

anselld

Tricky is correct, it is about the precise timing of escalations in rent.

However we are in the weeds of a decimal point of percentages which is perhaps important to understand but doesn't change the original conclusion that it would be silly to withdraw from a purchase for reasons of GR doubling in this instance.

Tom99

TrickyDicky101 wrote: »

When you determine the rate as 2^(1/25)-1 = 2.81% you are implicitly assuming GR increases year on year (so 2nd year is £102.81, 3rd year is £105.70, ... etc etc).

Saying you need to inflate £100pa at 2.81%pa for 25yrs to get to £200pa does not implicitly assume annual rent reviews.
If you were to compare this doubling rent over 25yrs with say an increase inline with RPI every 25yrs and ask which is better, the answer would be that if you think inflation will be less that 2.81%pa then an RPI increase would be better.

wine_night

We bought a flat with very similar terms, although the starting ground rent is higher at £250pcm. It is set to double in about 10yrs.

We had exactly the same thoughts you did, but proceeded with it anyway on the basis that the lease will be extended before the charges get too high. It might make sense for us to do the lease extension at the point ground rent doubles, if we still own the property then.

We had an offer for a deed of variation on the lease that would protect ground rent increases rising above RPI, but worked out that the legal costs involved would mean we were out of pocket ultimately.

I have seen other properties on the same development selling so I don’t think this has posed any problems going forward with vendors.

Ultimately it is your decision but this doubling every 25 years clause in the lease doesn’t seem to be that unusual for newish flats.

TrickyDicky101

Tom99 wrote: »

Saying you need to inflate £100pa at 2.81%pa for 25yrs to get to £200pa does not implicitly assume annual rent reviews.
If you were to compare this doubling rent over 25yrs with say an increase inline with RPI every 25yrs and ask which is better, the answer would be that if you think inflation will be less that 2.81%pa then an RPI increase would be better.

I was addressing what the maths were - annual rent reviews do not come into this.

For your second paragraph, the point is 2.81% is NOT the right measure of inflation to use in consideration.

But Anselld is right - the original conclusion remains that this is not a scary increase and shouldn't on its own scupper the deal.

Mickygg

Ignoring the maths tutorial here, I don’t see this as an issue. You are looking at about just under 3% annual inflation (I work on approx round numbers before the maths police hit reply) which seems reasonable currently although a tad top heavy.

Of course inflation could over a period of time go to zero or negative and that’s when the price will start to look more expensive but over time it should even itself out.

Also I’m assuming unless you are going to live until 120 or so you won’t get close to the £1600 anyway and neither will your future buyers.

I’m pretty cautious with set increases in things but this looks ok to me as far as damn rent increases go anyway.

Tom99

TrickyDicky101 wrote: »

For your second paragraph, the point is 2.81% is NOT the right measure of inflation to use in consideration.

Funnily enough the RPI Index has exactly doubled over the past 25yrs which would be equivalent to a constant inflation of 2.81%pa not some lower figure.

anselld

Tom99 wrote: »

Funnily enough the RPI Index has exactly doubled over the past 25yrs which would be equivalent to a constant inflation of 2.81%pa not some lower figure.

OK, so lets assume we can be sure inflation will continue every year for the next 125 years at 2.81%.

You can have a 125 year Lease starting now which doubles every 25 or you can have one which increases by 2.81% every year. Which one would you prefer?

And if you prefer doubling (which you should) then how low would the inflation rate need to be before they are equal in value?

Tom99

anselld wrote: »

OK, so lets assume we can be sure inflation will continue every year for the next 125 years at 2.81%.
You can have a 125 year Lease starting now which doubles every 25 or you can have one which increases by 2.81% every year. Which one would you prefer?
And if you prefer doubling (which you should) then how low would the inflation rate need to be before they are equal in value?

[FONT=Verdana, sans-serif]The original statement was that a rent increase from £100pa to £200pa after 25yrs is equivalent to an inflation rate of 2.81%pa, which it is.[/FONT]
[FONT=Verdana, sans-serif]What the capital value of the rent stream might me compared to a different review pattern has nothing to do with it.[/FONT]

anselld

Tom99 wrote: »

[FONT=Verdana, sans-serif]The original statement was that a rent increase from £100pa to £200pa after 25yrs is equivalent to an inflation rate of 2.81%pa, which it is.[/FONT]
[FONT=Verdana, sans-serif]What the capital value of the rent stream might me compared to a different review pattern has nothing to do with it.[/FONT]

The original statement was "Doubling every 25 equates to an annual inflation of 2.8%."

So I suspect everyone is correct depending on how they define "equates". Who said maths was an exact science?