Informal leasehold extension offer - accept, or go statutory?

DJ_Mike

I'm currently looking at selling the flat of my late father who passed away several months ago, and as part of my investigations approached the landlord about the leasehold, which has dropped to 68 years at this point.

I was given an offer to renew for £20k which, on the face of it (based on running through a calculator) was not an unreasonable price - however, the thing that gives me pause for concern is the doubling ground rent clause. Right now the flat has a similar clause, currently £50 and doubling every 33 years (in fact in a year or two it will double to £100). The new lease would start at £100 and double every 25 years - however, the new lease would last approx 190 years.

The advice I've been given so far is that I should be very wary of accepting such terms, as mortgage providers are increasingly anti-doubling rent - and I would be better off going the statutory route of adding 90 years at zero ground rent. However, my concerns here are the heavy time involved, the fees I would have to sink to solicitors and valuations just to get started, and crucially how much bigger a renewal fee I'd be likely to face, when the fee I've been given is already pretty heavy.

I am also trying to square this off against whether it is really all worthwhile vs just selling the flat in its current leasehold state and accepting its current lower value.

So my question is - has anyone been in a similar circumstance and what did you choose?

I could weather the time involved, but the money involved really scares me. I would be having to fork out for solicitors and valuation fees to pay - both for myself and the landlord, and then be potentially be faced with a far larger renewal fee. Which also begs the question - how much bigger would statutory/peppercorn rent likely be than the informal offer? Are there limits that the courts will accept if it gets to tribunal?

Andysandy

My brother took the option of an "informal" extension and regretted it. You are very dependent on your freeholder being ethical, honest and not trying to use the process to milk you for every penny you've got.

I can't explain the pitfalls any clearer than this article from the HOA explains it https://hoa.org.uk/2017/08/leasehold-scandal-not-extend-lease/

DJ_Mike

The only views I've got on the landlord are that my Dad always seemed to get along with him well, and he was perfectly affable when I spoke to him. The renewal they're offering is also a "blanket" renewal they drafted 10 years ago, the first time a flat in the same block went through this process. Hence it being approx 190 years - the original renewal was for a lease 200 years from the date of the first flat doing so.

So the precedence here is that several flats in the same block have already renewed on the same terms I would be asked to. However, that obviously isn't much to go on.

Tom99

The term and ground rent you have been offered look fine. £100 doubling every 25yrs also seems ok. How does the £20,000 premium compare with an approx calc for a statutory extension?
Since the freeholder already has a draft lease (have you seen a copy?) there should be no reason for them to delay.
If the figures stack up you could start the informal process but be ready to serve a section 42 notice if the freeholder delays or starts to alter the terms on offer.

Andysandy

Are you sure that this is the case? Have you had a look at the freehold title register (you can get it for £3 from the Land Registry website)? This will show you how many of the other flats have extended leases and whether they used the statutory process or not.

DJ_Mike wrote: »

So the precedence here is that several flats in the same block have already renewed on the same terms I would be asked to. However, that obviously isn't much to go on.

princeofpounds

The new lease would start at £100 and double every 25 years - however, the new lease would last approx 190 years.

From a purely financial point of view, this is nothing to be scared about in itself. Doubling every 25 years is a less than 3% escalation. That might be above inflation in these unusual times, but it's not aggressive either, especially when you are talking about such a tiny ground rent (assuming you didn't accidentally knock a zero off it!).


It's hard to comment about the renewal price itself, as I know nothing about the property otherwise and you are within the timescale where 'marriage value' becomes an issue. But you can do some estimated calculations to get an idea of how it might compare to the landlord's offer:


https://www.lease-advice.org/calculator/ - why not try this, and similar calculators, and tell us how you get on?


Go talk to a good *independent* mortgage broker about how it might affect applying for mortgages. You are right that ground rent escalation can be an issue for mortgage companies. But in all the cases I have heard about, it relates to situations where the ground rent is thousands p.a., the escalation clauses are significantly more aggressive. Mortgage companies can be bureaucratic but they are more nuanced on issues like this than newspaper headlines might suggest.


For example, Barclays is a major lender, and look at how they approach the issue in the article below:


https://www.ftadviser.com/mortgages/2018/09/12/barclays-sheds-light-on-ground-rent-policy/


Also, if you do come to the conclusion that mortgaging is going to be an issue, or that the valuation being proposed is wrong, write back to the landlord. You can negotiate with him, and if you can show evidence that what he is proposing is just a big practical problem that makes accepting impossible, he might be more willing to suggest modifications.


I am NOT saying that what the landlord has offered is a better deal. I don't know enough to suggest that. But it's also very likely that he is not trying to screw you, on the financial terms you have suggested at least.

DJ_Mike

Andysandy wrote: »

Are you sure that this is the case? Have you had a look at the freehold title register (you can get it for £3 from the Land Registry website)? This will show you how many of the other flats have extended leases and whether they used the statutory process or not.

OK this was really helpful - thank you. I've just done this and 4 of the flats in the estate have already renewed on the terms I was given, which gives me slightly more confidence that it may be a good way to go.

I've also asked the landlord if they can send over a draft copy of the renewal contract so I can examine it.

As regards the renewal price - I ran my own calculations at the time I got the informal offer, hence my concluding that the price being offered wasn't wholly unreasonable - especially if it avoided also having to fork out extra fees for the landlord to have a more formal valuation.

eddddy

DJ_Mike wrote: »

The advice I've been given so far is that I should be very wary of accepting such terms, as mortgage providers are increasingly anti-doubling rent

That's certainly a concern.

A website claims that:

Barclays turns down mortgage on flat where ground rent doubles every 25 years

link: https://www.leaseholdknowledge.com/barclays-turns-mortgage-flat-ground-rent-doubles-every-25-years

Although most lenders seem to suggest that doubling every 25 years should be OK. Here are some examples:

Barclays Bank UK PLC
Doubling ground rents: Should not double more frequently than every 20 years

Santander UK plc
e.g. multipliers such as doubling after fixed periods of less than 25 years; [are not acceptable]

Skipton Building Society
Clauses providing for Ground Rent increases that 'double' (or more) the preceding level are not acceptable.

Tesco Bank
The following increases are acceptable: Doubling no more than every 25 years

Nationwide Building Society
Ground Rent doubles <every 20 years (e.g. doubles every 5, 10 or 15 years) [are acceptable]

Link: https://www.cml.org.uk/lenders-handbook/englandandwales/question-list/1852/

So for some lenders, doubling every 25 years is currently the limit. But lenders sometimes toughen up their lending rules over time. I guess it's possible that they might push the limit further (e.g. doubling every 30 years) in future.

Skippy13

I would go the statutory route. We started an informal extension last year but, due to the terms, pulled out (ground rent more than 0.1% of the property value and doubling every 25 years). I don't trust freeholders and, if we ever decide to extend, we'll use the statutory route.

DJ_Mike

The property value with long leasehold is approx £170-175k. That makes the ground rent of £100 pa much less than 0.1%. However, I still worry that doubling grount rent takes the view that property value will only ever double every 25 years to match (and who knows what will happen in the next 25 years anyway).

The £20k offer I was given to extend was provided in line with what online calculators suggest - in fact the landlord provided a screenshot of one as the basis for what they'd accept for an extension.

I guess what I'm wondering really is how much higher a renewal fee they are likely to argue for if I do go the statutory route. Can landlords get away with charging substantially more for a statutory rent-free extension, or is it meant to be roughly in line with what online calculators suggest? Do tribunals stop that happening?