Buying a flat in London with indemnity policy

hamadani

Hello,
I am planning to buy my first buy to let property and have placed an offer for a flat in Central London (EC3N area) for a price of £542,000 which has been accepted. 
My solicitor has notified me that there is no mortgagee protection clause within the Lease and the seller is is happy to reduce the purchase price or make an allowance by
the cost of a suitable indemnity policy. 

The ground rent is currently £350 per annum but doubles every 25 years from 1998 (remaining lease term is 128 years). During the term of my mortgage (until 2045), the ground rent should not exceed £1,000 per annum (It becomes £1400 in 2048). However, I have been told if I want to to sell/re-mortgage the property in later years, the increasing ground rent may limit the marketability of the property. 

Based on the above facts, my questions are:
1) Is it risky to buy this property if I want to sell it in few years time? (let's say in 5 to 10 years time from now). In other words, is it going to considerably impact the selling price at that time?
2) Is this a factor to drop the asking price considerably (let's say 500,000 or even below that ) or it is not such a big issue that the seller would agree to sell it below its market value of £550,000?
3) Are there better ways than getting the indemnity insurance to alleviate this issue?
4) I have seen posts that the government is looking into ground rent law. Is this going to impact my case it the law changes after my purchase data?

Many thanks
Stay safe during this time

AlexMac

Sadly, no-one has responded, as they don't have a crystal ball. (or don't understand what a "mortgagee protection clause" is.  I must admit, even after googlong it, I don't either.  That's why I pay a solicitor; to explain geek stuff like this. Peferably in writing, as part of their report on title; the paperwork they talk me through before I buy, so I'm covered if they are wrong and I suffer!)

Ground Rent doubling lease clauses are anothe matter. But while one might hope that the Government will intervene on these insidious robbin bedsted clauses, I wouldn't hold my breath. 

So lets do the maths; if you sell in a few years- no problem .  The ground rent will only be £700 in the mid 2020's.  Or even if you hang onto it for for 30 years, you'll only be paying £3 grand-ish.  After that it gets tricky- so ask yourself; how long will the person you sell to in, say 2025 want to live there?  If 20-odd years, they'll do the maths and work out that they'll be into the £1400 you mention.  If 50 years, over five and a half grand (which is probably what a gallon of petrol will cost in 2030? Not that you'll be able to buy petrol?)

However, if the gaff is still standing in 100 years from now, and assuming another  150 year lease on the same terms , the prospective buyer will work out that while they are only copping ground rent of eleven grand or so, the mug who buys it, will, at the end of the lease, be paying  a third of a Mil, rising to £700 grand in the mid to late 22nd Century.  

Which might seem impossibly futuristic... if it wasn't for the fact that I bought my 1st house in 1975; over 45 years ago. And although I've moved on, it will probably still be standing in 100 years time..

Amazing how much fun you can get from a spreadsheet when self-isolating...

Is anyone out there who can give a proper reply?

davidmcn

In relation to whatever the indemnity policy covers, the point of those is essentially that they prop up whatever the value of the property is (as ultimately what they'd pay out is the loss in value if the defect causes a material problem) - you don't get another bite at the cherry by also chipping away at the price. Hasn't your solicitor advised you on this?

The amount and rate of increase of the ground rent should be taken account of in your surveyor's valuation. You have had a surveyor value the property, taking into account the terms of the lease, haven't you? Obviously if that doesn't match the price you've offered, you've got some thinking to do. But as far as I've read, doubling every 25 years isn't particularly problematic, as that's probably not too far from what inflation would be.

hamadani

Thank you both (AlexMac & davidmcn) for your input and informative answer. 
My solicitor has said: "The indemnity insurance policy is to provide insurance against the risk that the landlord treats the lease as an ‘assured tenancy’ and brings the lease to an end without any protection to your lender’s security over the property".

Both the surveyor valuation and home buyer report have confirmed the valuation price as £542,000 which I believe they should have taken into account the remaining lease term and did not raise any concern neither on that nor the ground rent.

I have just become concerned as my solicitor said "if you come to sell/re-mortgage the property in later years, the increasing ground rent may limit the marketability of the property." and hence that's why I was to ask for a price reduction to accommodate a potential loss at the time of selling.

Any other advice around this would be greatly appreciated
Thanks

eddddy

This is a complex issue.

The problem is that the Ground Rent will eventually exceed £1000 (in London).

• Because of an anomaly  in the Housing Act 1988, when the Ground Rent exceeds £1000 in London (or £250 elsewhere), and the flat is your principle home, your lease becomes an Assured Shorthold Tenancy. That means, if you fail to pay your Ground Rent, it's much easier for the freeholder to forfeit your lease.
  

• i.e. As an owner occupier, if you don't pay your Ground Rent for 3 months, you can lose your flat without compensation relatively easily - and hence lose all of your £542k.

• This shouldn't affect you, because you are buying the flat as a BTL - so it's not your principle home. But it would be an issue if you want to sell the flat to somebody to use as their principle home.

That scares mortgage lenders, because if the lease is forfeited, you still owe the lender a huge chunk of mortgage - but they no longer have your flat as security.

• Indemnity Insurance might protect a mortgage lender, but it probably doesn't protect the owner occupier.

• i.e. If the owner occupier fails to pay the ground rent, and their lease is forfeited, the insurance company will pay off any mortgage, but they won't pay anything extra to the owner occupier. (So the owner occupier might still be hundreds of thousands out of pocket.) 

There is talk of amending the housing act to remove this anomaly - but it's not clear if/when this might happen.

Lots of solicitors discuss this issue on their websites. Here are some examples:
https://www.mishcon.com/news/publications/real_insights_-_property_update_05_2017/assured_tenancy_traps__the_unexpected_ast_05_2017
https://levisolicitors.co.uk/news/ground-rent-increases-and-unexpected-assured-shorthold-tenancies/
https://www.attwells.com/site/news-and-events/leases_with_high_ground_rent


Edit to add...

hamadani said:

Both the surveyor valuation and home buyer report have confirmed the valuation price as £542,000 which I believe they should have taken into account the remaining lease term and did not raise any concern neither on that nor the ground rent.

Valuers and surveyors don't normally read leases - so it's likely that they are unaware of the issue with ground rent (unless somebody told them).

I believe that they usually value on the assumption that the property has at least 85 years unexpired on the lease, and no onerous terms in the lease. 

hamadani

Thank you eddddy, that was really useful. I wish my solicitor could have explained and elaborated the situation as you did in this post!
So, essentially if the law does not change, I will find it difficult to resell the property.
Just on your below point and from a legal perspective, if the law gets changed and this anomaly gets fixed, will it be backdated to prior dates purchases or I will not benefit from it if I go ahead to buy it now

There is talk of amending the housing act to remove this anomaly - but it's not clear if/when this might happen.

Thanks again for your insightful reply.

eddddy

hamadani said:

Just on your below point and from a legal perspective, if the law gets changed and this anomaly gets fixed, will it be backdated to prior dates purchases or I will not benefit from it if I go ahead to buy it now

The purchase date isn't likely to be important. (So any changes to the law would probably apply to you if you bought now.)
It would be the date that the owner fails to pay their ground rent that is important.

For example, say the law changes on 1st Jan 2022, it would probably work like this: 

• If somebody fails to pay their ground rent before 1st Jan 2022, the current law applies.
• If somebody fails to pay their ground rent after 1st Jan 2022, the new law applies

It doesn't matter what date they originally bought the property.