Ground rent

Alyssamama

Hi all, 
I am looking for some advice. 

I am currently looking to buy my first property which is a leasehold flat for
£270k. The sellers have started the lease extension process (via the informal route) they will be paying for it. I think the flat had around 69 years left to run and the sellers were only going to extend to 99years (the premium for this was £10k), but we negotiated for the lease to be extended to 159 years instead (an additional 90 years. The premium for this is £18k) . The flat is classified as Greater London and the ground rent at the moment is £100 per annum. We have now been given two options for the ground rent provision by the freeholder:- 

A) £60 until June 2025 then £120 until June 2058, then £240 until June 2091 then £480 until June 2124, then £960 until 2157 then £999 for the remainder of the term.

£200 per annum until 23rd June 2025

 £300 per annum from 24th June 2025 – 23rd June 2058

£400 per annum for the remainder of the term.

We plan to live in it for around 5-8 years and then sell it and buy a bigger place. 

I would like some advice as to which you would think would be more reasonable, option A would benefit us as we would be paying less but would option B be more attractive to future buyers?

Thank you all in advance.

princeofpounds

Neither of these options are likely to cause you major trouble. As you are in London, the AST trap doesn't start until £1000. And the increases are likely spaced enough that they wouldn't impair the mortgageability of the property.

As to which option is better - financially-speaking, it basically depends on something called a discounted cashflow model. Cashflows in the far future are less valuable that cash outflows now - that should be intuitive. The question is what is the right discount rate to use? Without getting into the complexities of explaining that, it seems that option A is better with a discount rate of over ~2% and option B of under ~2%. 

However, if you eventually go for a statutory lease extension the ground rent will probably be valued at a significantly higher discount rate so I would pick option A. 2% is not an expensive source of 'funding' for you.

Obviously I appreciate this is just a three-party negotiation, so I assume you are happy likely having to do another lease extension and paying off a lump sum to remove the ground rent at some point over the next 19 years.

eddddy

princeofpounds said:

Without getting into the complexities of explaining that, it seems that option A is better with a discount rate of over ~2% and option B of under ~2%. 

The discount rate (or Yield Rate as it's called) used for ground rent with a lease extension is usually between 5% and 7% (but it can be as low as 2% in unusual/special circumstances).  So option A is likely to be better in this case.

If you want, you could ask for an alternative quote for a £0 ground rent.

The planned leasehold reforms might change the calculation - but I doubt it would be by much.

The planned leasehold reforms might also let you 'buy-out' the ground rent without a lease extension, which might be acceptable to you as you'll have the balance of a 159 year lease. (Or extend it to 990 years, if you prefer.)

Alyssamama

Thank you all for the advice. 
Yes we did think with option A we would save more esp if we planned to sell in 5-8 years time. We just wasn't sure if option A would be put off potential buyers or if lenders would refuse to lend because of the "doubling ground rent" even though it caps at £999. We didn't want to spend money on extending the lease hence why we negotiated with the sellers to have it extended to 159years as oppose to 99years. 

Alyssamama

My solicitor did try to negotiate a nil ground rent but the freeholders rejected that (of course they would) and came back with those two options.