Leasehold Ground Rent Escalation Clauses

chrish99

Hi
I am currently searching for a flat to buy.. and having had an offer accepted, mortgage agreed, my solicitor reviewed the leasehold and advised that the ground rent increases by 50% every 5 years. As well as this being a bit steep, and likely to cause issue later.. the bigger concern is that it will soon put the ground rent over £250 per year, and its outside of london, and so there are various things which come with that.
I am looking at other flats and attempting to get copies of the leaseholds from the seller via the estate agents to see if i can find a flat which doesnt have this issue. Keen to avoid paying solicitors just to read a document, i was hoping to spot the 50% increase myself   However, reviewing the leasehold document i have for the flat i was hoping to buy... it says...

 1.1 The base figure means the Index Figure for the month proceeding the commencement of the Term being 178.5
2.2 The Rent for any review period is to be the initial rent plus the amount which bears the same proportion to the initial rent as the increase bears to the base figure
From an earlier section, the initial rent is £125 per year, and the review period is every 5 years.

Is anyone able to translate 2.2 for me. As mentioned above, my solicitor says this translates to a 50% increase every 5 years. But i dont really understand, and if i dont understand im not sure i can spot it in the other flats im looking at. I will of course ask my solicitor to review them properly before buying, i was ust hoping to do the sanity check myself and a bit quicker. 
Thanks for any help
Chris

chrish99

A further relevent clause:
1.2 The increase means the amount (if any) by which the index for the month preceding the relevant review date exceeds the base figure

chrish99

And a further
1.3 The index means the all items index figure of the Index of retail prices

davidmcn

That looks like it's indexed in line with RPI. Not sure where your solicitor is getting 50% from, do you have their advice in writing?

ChloeManoey

The fact alone that it is reviewed every 5 years, is an alarm bell. Reviews each 20ish years are more acceptable to lenders. You'll be able to spot that clearly in the leases you read. Anything 15+ years is preferable. The more the better. 

That clause is basically just saying it is increased in line with RPI, you don't need to understand the calculation really. But you will recognise this clause again and the way it is written. Others you might read will say the ground rent doubles, increases to suchandsuch amount etc, so you'll be able to tell the difference there too. 

ChloeManoey

Personally I'm not sure how it translates to a 50% increase but hopefully someone brainy will be along soon! 

princeofpounds

It appears to say that:
- the ground rent will escalate by the increase in the Retail Prices Index (RPI). 
- this will be assessed once every 5 years.
- 1.2 means, for example, that if the RPI index has moved from 100 at the start of the lease to 120 on the review date, then the 'increase' is 20.
- 2.2 means, for example, that if the RPI index has increased by 100 to 120 as in the example above, the proportion of the increase is 20/100 = 20%, and the ground rent will therefore increase by 20%.

This appears to be a very long-winded legal way of saying that the ground rent inflates with RPI every 5 years. As noted, RPI is totally normal, 5 year reviews is unusually frequent but different lenders have different policies on that.

I do not know where your solicitor gets 50% every 5 years from, I suspect they are talking casually (using memories of inflation figures from years ago) or you are missing important clauses out. RPI can vary greatly over time but has been about 2-3% for the last decade on average. 1.025^5 is 1.13 i.e a 13% increase every five years. 

Ask them to explain in detail, and ask them to explain the consequences if RPI spikes for a few years and the ground rent does go over £250, in say 10-20 years time. 

PS: The solution to all this of course is to apply for a statutory lease extension after two years of occupation, which would remove the ground rent. But of course the developer gets a second bite of the cherry from you, so factor it in to any offer you make.

chrish99

Thanks Chloe
Ive had my pen and paper out  
From what i understand from the All Items RPI index on Office of National Statsitics website, the index is RPI, and that index was 178.5 in 2005 (when the term started).  In 2013 (8 years was the first review period), the index was 250. So that was 72 higher than the base figure which is 40%. Therefore, the rent increase matches that proportion so the new rent is 40% higher than the initial rent (£125). So i think the rent is £175.

For the second review was in 2018. RPI index was 279 which is 101 higher than the base figure of 178 which is 57%. So the new rent will be 57% higher than the initial rent of 125. So i think the new rent is £197

The third review will be in 2023. Extrapolating RPI i think the index will be something like 313 which is 135 higher than the base figure of 178 which is 76%. So again new rent will be 76% higher than the initial rent of 125. So new rent will be £219.

So i think:
2005 - 2013  rent was 125
2013 - 2018  rent was 175
2018 - 2023 rent is 197
2023 - 2028 rent will be 219

So that is like a rise of £22-£25 every 5 years... which looks like about 11% every 5 years... so like 2% every year which looks like RPI. Now im really really wondering how my solicitor has advised 50% every 5 years...

Very useful to know if anyone agrees with the maths above

From speaking with the estate agent, the ground rent is currently £182 per year. So that doesnt really match up.. but equally, given it started at £125 in 2005... that is on average 2.7% rise per year. Whereas if it had increased 50% every review period it would be £281 by now.. which it isnt

Thanks,
Chris

chrish99

thanks princeofpounds. Sorry i hadnt seen your reply before posting. That totally makes sense and i think lines up with the figures and calculations ive worked through. 
The leasehold says the base figure is 178.. however RPI on the "month proceeding the term start date" was actually 191. If i use 191 as the base figure... my calculations say the current rent will be 182.. which it is  
Thanks, starting to make sense.. well all apart from my solicitors view which i was on the verge of pulling out of buying this flat as they said it would be unsellable in the future and the mortgage company probably wouldnt touch it. 
thanks again

chrish99

davidmcn said:

That looks like it's indexed in line with RPI. Not sure where your solicitor is getting 50% from, do you have their advice in writing?

No, not at the moment. But will speak to them in the morning!