FTB HTB leasehold questions

ikanoi

Hi, FTB here, thanks for reading.
Currently waiting to exchange on a new build (conversion) flat and have just recieved my contract docs to look over. The legal report states:

The basic details of your Lease are as follows:

• Your Lease will be created upon legal completion.
• The term of the Lease is 250.00 years from 1st January 2019.
• The Ground Rent is £245.00 per year.
• The rent increases apply throughout the term
• The ground rent increases at regular intervals as set out in clause number 12 of the Lease. The next  increase  will  be  on  1st  January  2029.  The  rent  increases  by  reference  to  the  Retail  Prices Index (or Consumer Prices Index or another inflationary Index) every 0 years.  The future amount payable can only be determined at the time of the review and we are therefore unable to confirm what the next increase will be.

Is it normal for the lease to have already 'started'? If so, why state that it 'will be created'? Maybe it's normal but it seems odd to me that I've already lost almost 2 of the first 10 rate-rise-free years on a brand new property?

Also, I have been doing a bit of reading on the £250 ground rent threshhold for leaseholds and the fact that you can be pushed into an AST with escalating ground rents. Is it worth pushing back on this and trying to cap the ground rent to stay below the threshhold? I'm proceedable and we're almost through this process, with the impending HTB scheme changes I feel like I may have a little bargaining power with the developers.

princeofpounds

I don't know why they would choose to pre-date a lease - perhaps the leasehold title was actually created earlier. But there is almost no difference in valuation between a 248 year lease and a 250 year lease, so from that point of view it doesn't matter.

The main costs for you in either extending your lease (which you don't need to do for well over a century) or collectively enfranchising will be related to your ground rent and the escalation clause. To give you an idea, a statutory extension on a property worth £300k would cost you £4-5k even if your ground rent wasn't escalating (so it will be more in practice). Of that, the ground rent amount accounts for about 4k of value, renewing a 248 or 250 year lease would be about 1k's worth, and the leasehold advice calculator doesn't even given a different answer in either scenario.

I assume your escalation clause does not inflate every '0' years....

ikanoi

princeofpounds said:

I assume your escalation clause does not inflate every '0' years....

Actually just noticed that too, definitely going to be querying that typo!

eddddy

Regarding the lease start date - are there other flats in the building which were converted earlier?  The freeholder might want to align the start / end dates of all the flats in the building.

And the £250 ground rent issue - there's talk of getting rid of that in the next round of leasehold reforms, because it's clearly unreasonable (which should happen before your next GR review). But obviously, there's no guarantee of that.

In theory, as you're buying a new lease from the freeholder, you should be able to negotiate on any of the terms in the lease that you mention - but the freeholder might refuse to budge.



You can also ask about the possibility of buying the freehold yourself or jointly with other leaseholders ('Shared Freehold'). (But don't take the freeholder's word for it if they say they'll sell you the freehold for £x at some point in the future - even if they say it in writing in a letter. You'd need to discuss with your solicitor about getting the offer incorporated in a formal contract.) 

firsttimesellerldn

Is the property in London? It only becomes an AST when ground rent hits £1k London, rather than £250 elsewhere. My ground rent rises in line with RPI but the lease specifically caps it at £999 max to avoid it becoming an AST. I would request it, perhaps via solicitors. Nothing to lose. No idea if they’d grant it, but people are going to struggle to sell in future otherwise surely? And let’s face it, there’s no justification for the increases. They might however have factored it in to their budgets and be planning to sell on freehold, which would be worth less if they agreed to cap it. 

BernieW

The leases will have been drafted and the wording finalised at some point prior to the first converted flat being ready to sell. The start date of 1st January 2019 may well have been logical if the wording was finalised in February/March 2019. And if one of the flats has completed on that basis, the others will be the same as the freeholder will want co-terminus documents.

£245pa is conveniently just below the £250 mark, in recognition of the apparent problem you mention. More importantly, many mortgage lenders will currently not like a ground rent which is more than 0.1% of the market value. So, if you're buying for more than £245,000 then probably not a problem - but if lower than that, you might be limited on mortgage choice.

In any event, there is an easy way around the £250 assured tenancy (not assured shorthold tenancy) worries. Complete your purchase, wait two years, serve a section 42 notice - which forces the freeholder to 1) extend your lease by +90 years; i.e. 340 years from 1st January 2019 in this case ... and 2) to change the ground rent to a peppercorn; i.e. £zero. Yes it will cost you a couple of grand - but you'll recoup inside a decade and your assured tenancy worries will have gone.

The ultimate answer is to buy the freehold, with your fellow leaseholders. The cost will be very similar to the lease extension cost AND you get the benefit of controlling your destiny ... including controlling service charge expenditure, which is the real financial drain on your pocket over time.

Happy to discuss and assist if/where needed.

ikanoi

BernieW said:

In any event, there is an easy way around the £250 assured tenancy (not assured shorthold tenancy) worries. Complete your purchase, wait two years, serve a section 42 notice - which forces the freeholder to 1) extend your lease by +90 years; i.e. 340 years from 1st January 2019 in this case ... and 2) to change the ground rent to a peppercorn; i.e. £zero. Yes it will cost you a couple of grand - but you'll recoup inside a decade and your assured tenancy worries will have gone.

This is so helpful, thank you for this comment. I have read a bit about this route and have found a lot of anecdotes around people reaching the 2 year mark only to find their leasehold has been sold off to the highest bidder but armed with this knowledge we can definitely plan for that situation. I will definitely read up on this process further, do you know if the freeholder is obliged to grant peppercorn rent?