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Flat Purchase - Escalating Ground Rent

edited 30 November -1 at 12:00AM in House Buying, Renting & Selling
37 replies 2.2K views
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  • AdrianCAdrianC Forumite
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    davidmcn wrote: »
    Doubling every 25 years is equivalent to just under 3% annual inflation - which is higher than the current general UK rate but historically fairly modest. The "defect" is that it isn't linked to the actual rate of inflation (or, more relevantly, property prices), but it's unlikely to become outrageously high in real terms. I wouldn't be overly concerned about it - as above, something like doubling every 10 years would be more onerous.
    In addition to this, doubling every 25 years is lower total expenditure than inflationary increases annually - because what's important is the total amount payable over time.

    Have a two-second play with a spreadsheet to see what'll happen. It's not hard.

    Years down the first column, labels across the first row. B2 and C2 = current ground rent, then add say 3% every year going down column B. Column C - just double every 25th anniversary.

    Then sum columns B and C at the bottom.

    Add column D, with 10yr doubling, if you want a great illustration of why the period, not the doubling, is the real issue.
  • Tom99Tom99 Forumite
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    akorn77 wrote: »
    Hi All,

    I've found a flat I'm very interested in, however it has an escalating ground rent and I'm very worried about it impacting future re-sale. I think the seller is aware of this, and seems to be super keen to shed it - she even offered to sell it to me chain free! Any thoughts?
    Lease - 236 Years
    Ground Rent - £150; doubling every 25 years.
    Thanks
    You can always buy out the ground rent after 2yrs using a statutory lease extension and if the current seller has owned the flat for the past 2yrs they could agree to serve notice to extend which you take over and pay for so you don't have to wait 2yrs.
    The cost of buying out the ground rent might be let's say £5,000 plus say £3,000 costs. You would need to get an RICS valuation to be more precise.
  • bouicca21bouicca21 Forumite
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    As Edddy says in post 8, check the actual clause. My ground rent doubles twice in the next 50 odd years but is then capped.
  • LandyAndyLandyAndy Forumite
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    AdrianC wrote: »
    In addition to this, doubling every 25 years is lower total expenditure than inflationary increases annually - because what's important is the total amount payable over time.

    Have a two-second play with a spreadsheet to see what'll happen. It's not hard.

    Years down the first column, labels across the first row. B2 and C2 = current ground rent, then add say 3% every year going down column B. Column C - just double every 25th anniversary.

    Then sum columns B and C at the bottom.

    Add column D, with 10yr doubling, if you want a great illustration of why the period, not the doubling, is the real issue.

    I just tried this :D

    Staggering difference. :eek:
  • m0bovm0bov Forumite
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    After 2 years, do a statutory lease extension on peppercorn ground rent(i.e. £1). Sorted.
  • edited 9 January 2020 at 2:53PM
    akorn77akorn77 Forumite
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    edited 9 January 2020 at 2:53PM
    Tom99 wrote: »
    You can always buy out the ground rent after 2yrs using a statutory lease extension and if the current seller has owned the flat for the past 2yrs they could agree to serve notice to extend which you take over and pay for so you don't have to wait 2yrs.
    The cost of buying out the ground rent might be let's say £5,000 plus say £3,000 costs. You would need to get an RICS valuation to be more precise.

    I read that you need to pay 9x the ground rent to buy it out. But in law, do you have the absolute right to do this?

    Secondly, given that this is escalating ground rent would it make any difference to the end sum? e.g. Based on £150, to buy out ground rent would be £1,350. But would they use today's value, or a future ground rent value?

    Had no idea this was possible?
  • edited 9 January 2020 at 3:20PM
    Tom99Tom99 Forumite
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    edited 9 January 2020 at 3:20PM
    akorn77 wrote: »
    I read that you need to pay 9x the ground rent to buy it out. But in law, do you have the absolute right to do this?

    Secondly, given that this is escalating ground rent would it make any difference to the end sum? e.g. Based on £150, to buy out ground rent would be £1,350. But would they use today's value, or a future ground rent value?

    Had no idea this was possible?
    It's not a fixed sum, you have to pay the freeholder open market value of the ground rent but you do have the right to force the freeholder to sell providing you qualify by owning for 2yrs, or the seller qualifies and serves a notice now (after exchange but before completion) which is assigned to you.
    If the rent was a fixed sum of £150 for the whole term you might pay based on a yield of between 6% to 7% which gives a factor of 16.7 (100/6) to 14.3 (100/7) but since your ground rent doubles in 10yrs time that factor is going to be higher.
    If you discounted the rising £150pa at 6% you get to £5,400 and at 7% £4,100. Add to that both sides costs lets say at least £2,000 maybe £3,000 and you are talking about £6,100 to £8,400.
  • akorn77akorn77 Forumite
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    Tom99 wrote: »
    It's not a fixed sum, you have to pay the freeholder open market value of the ground rent but you do have the right to force the freeholder to sell providing you qualify by owning for 2yrs, or the seller qualifies and serves a notice now (after exchange but before completion) which is assigned to you.
    If the rent was a fixed sum of £150 for the whole term you might pay based on a yield of between 6% to 7% which gives a factor of 16.7 (100/6) to 14.3 (100/7) but since your ground rent doubles in 10yrs time that factor is going to be higher.
    If you discounted the rising £150pa at 6% you get to £5,400 and at 7% £4,100. Add to that both sides costs lets say at least £2,000 maybe £3,000 and you are talking about £6,100 to £8,400.

    Thank, makes sense. This is called Deed of Variation isn't it? Or is that something different.

    Does the Freeholder have the right to reject those numbers and ask for whatever price they want though?
  • edited 9 January 2020 at 3:34PM
    Tom99Tom99 Forumite
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    edited 9 January 2020 at 3:34PM
    akorn77 wrote: »
    Thank, makes sense. This is called Deed of Variation isn't it? Or is that something different.
    Does the Freeholder have the right to reject those numbers and ask for whatever price they want though?
    You would eventually sign a deed of variation but the process is called a statutory lease extension. To kick it off you send the freeholder what's called a Section 42 Notice.
    You put forward your valuation figure and the freeholder can, and most likely will, put forward a higher figure. You then have a certain time to try and reach agreement after which you can refer the matter to a 3rd party (at more cost of course).
    You need to get the notice exactly right and be able to support you calculations so you will need a solicitor and surveyor acting for you. You also have to pay the freeholder's solicitor and surveyor and their costs are likely to be higher because you, not the freeholder, are paying for them

    It is possible the Government will simplify the process in the next few years but there is no guarantee that will happen any time soon.

    you can read more here:
    https://www.lease-advice.org/advice-guide/lease-extension-getting-started/
  • eddddyeddddy Forumite
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    akorn77 wrote: »
    Thank, makes sense. This is called Deed of Variation isn't it? Or is that something different.

    It's better to call it a 'lease extension'. Then everyone will know what you mean.

    A deed of variation is used to vary (or change) a lease. Extending a lease is one example of varying (or changing) a lease.

    There are many other ways of varying (or changing) a lease as well.

    akorn77 wrote: »
    Does the Freeholder have the right to reject those numbers and ask for whatever price they want though?

    If you follow the statutory route, the freeholder can challenge the the way the numbers are calculated.

    e.g. Your valuer might believe that yield of 7% should be used, but the freeholder's valuer believes that 6% should be used.

    But they cannot 'set whatever price they want'.
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