Doubling Ground Rent clause on our property - first we knew about it!

TreeFitter222

We purchased our property at the beginning of 2018 and we're now in the process of selling again.

Shockingly, we have received a letter from our buyer's solicitor stating that there is a doubling ground rent clause (every 25 years) on the lease of our flat, which included the official copy of the lease dated 2014. The letter goes on to say that without a deed of variation being added to the lease, the lender cannot mortgage the property. This is the first time we have ever seen this document!

This is made very ironic by the fact that we are a bit obsessive about looking for a new property without a leasehold, ground rent (including new builds for trimming the verges) or purchasing on an unadopted road.
The only document we received (labelled "Official Copy (Lease)") is dated back to 1981. The new document was created in 2014 but we never saw this while in the process of purchasing.

I approached the management company to ask for a deed of variation to be agreed with the landlord and they have come back with a figure which totals almost £7,000!!!! Bearing in mind that we only pay £100 a year and the ground rent charge is due to double in 2034, this is an incredible amount of money. 

What can we do in this situation? If we had known about this doubling ground rent charge we would never have purchased the property and I'm not sure our lender would have either.

user1977

I didn't think doubling every 25 years was viewed as that much of a problem (that's roughly what you might expect inflation to do anyway).

What did your solicitor tell you about the lease at the time you bought?

TreeFitter222

Hi user1977,
Our solicitor told us about the ground rent but not that it was due to double. 

Tiglet2

Doubling ground rent every 25 years is not usually a problem and lenders should be okay with it.  It's the 10 year doubling ground rent clause that is a cause for concern.

You could serve a Section 42 notice to extend the lease and then assign the notice to your buyer.  Extending the lease via the statutory route removes ground rent from the lease and adds an additional 90 years to the lease. The down side is your buyer would have to pay an additional premium to purchase the extension and cover the freeholders legal costs.

Your solicitor has to send you the letter from the buyer's solicitor so that you can decide how you wish to proceed.  It doesn't mean you have to agree with the buyer's request, but do seek your solicitor's advice.

princeofpounds

There are a lot of things to say about this.

Firstly, it is exceptionally odd that your solicitor did not discuss this with you when buying. At the very least, you should have been informed about it. You probably were, in one of the piles of paperwork you were sent. Go back and look, see what you were told. Contact your solicitor if necessary. Check. Because if they failed to notify you then a complaint and a trip to the ombudsman or litigation may be justified. 

Some further information here (bear in mind it's also an advert for their litigation services) - https://matthewwilkinson.co.uk/ground-rent-escalation-clauses/

Secondly - you should have noticed this yourself anyway, even if you didn't understand the implications. I assume you did actually read the lease you were buying?

As for your lender - lending standards change over time, and aversion to escalating ground rents is something that has tightened over time. It tightened even more when the judgments concerning the 'AST trap' (where your lease turns into an AST due to ground rent exceeding a threshold, giving the freeholder more rights to end the lease) were issued, I think that was around 2017/18.  Your lender may have been misinformed, but more likely they didn't have the criteria in place to stop them lending at that time.

Thirdly - doubling every 25 years is on the borderline of being a problem. Have the buyers enquired with their mortgage broker to see if another lender will lend on such terms? 

So what can you do? Either buy your freehold or extend your lease through the formal process at Tribunal (Which will set ground rent to zero). The £7000 offer you have received may just be kite-flying - they can ask anything they like as long as you don't use the formal process. If you tell us the approx value of your property and the length left on the lease then we can take a guess at how cheeky the demand is.

You need to work out what you would need to pay at Tribunal and make an offer that is around that level. Point out that they would get nothing more at Tribunal and may incur legal expense on top of that. Your offer should be a little bit above the statutory valuation because it will incentivise the freeholder to accept it, but save you money on legal expenses for not having to go to Tribunal. 

Without escalating ground rent, it's very easy to value an extension or the freehold. With, it needs some knowledge of the formulas used. A surveyor who works in this area can do it quite cheaply. Or, given that you will need a solicitor who specialises in lease extensions or buying freeholds, you can usually work through them.

Edit: and yes, it's possible to start a formal lease extension process and assign it to the new buyers.

Gentoo365

Is there a cap? 
In my old lease there was a cap and that meant that even in 20XX (well into the future) it could only reach a certain figure, and that meant it wasn't indefinitely doubling.

eddddy

Just to clarify - a couple of  people have mentioned starting a formal lease extension (serving a section 42 notice) and assigning the benefit to your buyer.

Based on what you say, that's unlikely to be a solution.

If the buyer's mortgage lender is refusing to lend because of the ground rent, starting the lease extension process is unlikely to be acceptable, they will want the problem fixed before completion. A formal/statutory lease extension typically takes between 6 and 18 months to complete.

Do you know who the buyer's mortgage lender is? I've heard people mention that Barclays/Woolwich don't accept 25 yearly ground rent doubling - but I think many other lenders still will.  But your buyer may not be open to the idea of trying another lender.

TreeFitter222

princeofpounds said:

There are a lot of things to say about this.

Firstly, it is exceptionally odd that your solicitor did not discuss this with you when buying. At the very least, you should have been informed about it. You probably were, in one of the piles of paperwork you were sent. Go back and look, see what you were told. Contact your solicitor if necessary. Check. Because if they failed to notify you then a complaint and a trip to the ombudsman or litigation may be justified. 

Some further information here (bear in mind it's also an advert for their litigation services) - 

Secondly - you should have noticed this yourself anyway, even if you didn't understand the implications. I assume you did actually read the lease you were buying?

As for your lender - lending standards change over time, and aversion to escalating ground rents is something that has tightened over time. It tightened even more when the judgments concerning the 'AST trap' (where your lease turns into an AST due to ground rent exceeding a threshold, giving the freeholder more rights to end the lease) were issued, I think that was around 2017/18.  Your lender may have been misinformed, but more likely they didn't have the criteria in place to stop them lending at that time.

Thirdly - doubling every 25 years is on the borderline of being a problem. Have the buyers enquired with their mortgage broker to see if another lender will lend on such terms? 

So what can you do? Either buy your freehold or extend your lease through the formal process at Tribunal (Which will set ground rent to zero). The £7000 offer you have received may just be kite-flying - they can ask anything they like as long as you don't use the formal process. If you tell us the approx value of your property and the length left on the lease then we can take a guess at how cheeky the demand is.

You need to work out what you would need to pay at Tribunal and make an offer that is around that level. Point out that they would get nothing more at Tribunal and may incur legal expense on top of that. Your offer should be a little bit above the statutory valuation because it will incentivise the freeholder to accept it, but save you money on legal expenses for not having to go to Tribunal. 

Without escalating ground rent, it's very easy to value an extension or the freehold. With, it needs some knowledge of the formulas used. A surveyor who works in this area can do it quite cheaply. Or, given that you will need a solicitor who specialises in lease extensions or buying freeholds, you can usually work through them.

Edit: and yes, it's possible to start a formal lease extension process and assign it to the new buyers.

Thank you for your informative post.

The value of the property is around £170,000 with 118 years left on the lease. I appreciate your advice. 

couriervanman

So in 100 years the ground rent will have increased from £100 to £800 what's the problem

AdrianC

TreeFitter222 said:

The value of the property is around £170,000 with 118 years left on the lease. I appreciate your advice. 

So a statutory lease extension will cost you not much over a couple of grand plus legals, taking you to ~200 years at peppercorn.

princeofpounds

couriervanman said:

So in 100 years the ground rent will have increased from £100 to £800 what's the problem

The problem is:

a) Many lenders will no longer lend on properties that have onerous leases, such as those with ground rents that double too quickly. And yes, it may not make much practical difference, but the industry has moved to new standards and will not accept it any more.

b) Doubling ground rents run the risk of entering the 'AST trap', whereby the type of lease automatically changes to an AST once the ground rent is above a specified figure (250 outside London, 1000 inside). There was a surprise legal decision a few years back that decided that would give freeholder the right to end the lease early in certain conditions. That is also not acceptable, despite not being a practical risk if care is taken.

TreeFitter222 said:

Thank you for your informative post.

The value of the property is around £170,000 with 118 years left on the lease. I appreciate your advice. 

OK, so if you didn't have escalating ground rent, it would cost you 2-3k to extend the lease (+ legals). With escalating ground rent, it would be 1-2k higher, at a guess. So they are being a bit cheeky with their demand.

Suggest you respond to them saying that their valuation is unrealistic and that you will look into a statutory lease extension instead as it will provide better value, unless they want to make a more reasonable offer. If they are sensible, they will.

As I said, you can work with a relevant solicitor - you'll need one anyway so no harm starting with them from now. You can also get a valuation organised, which will enable you to be even more precise about what a more reasonable offer would look like. I'd do the maths myself if I could - it's actually fairly trivial - but I've never actually found a practice guide for valuation - suspect it's behind some RICS paywall or something.