Onerous Ground Rent?

MidCentury

Hi,

we received an email this morning saying our NatWest mortgage application had been approved, subject to valuation survey. I then emailed our Solicitor to update them on the news and also to see how they were getting on with the searches etc, and they replied saying that they had not started the searches as they had identified that the Ground Rent was onerous, and wanted confirmation that we would want to proceed with the purchase.

The lease was originally granted in 2007 for 125 years, with the Ground Rent commencing at £200 per annum. This then doubles every 25 years, so the first increase will be in 2032. The solicitor says the lender may not be happy with this, but does anyone have any experience or knowledge of how NatWest will view this scenario? 

From what I can tell, a Ground Rent of 0.1% or more is generally considered “onerous”, the property price is £285k, so the Ground Rent is below this threshold until the first increase, and may be worth over £400k in 11 years time, so could still be under the threshold. 

I understand that there are ways to extend the lease once the property has been purchased and that the Government are working on reforms to make make this easier in future, which is good to know, but I am now worried that we won’t get a mortgage offer on this place and will have to start over with our search.

Thanks in advance,

MC

bouicca21

I assume that a property being sold for £285k is outside London.  A ground rent of over £250 a years outside London is problematic because the Housing Act of (can’t remember date) turns it into an AST.  Some lenders will regard this as onerous.

Obviously there is a chance that the law will change, but who knows when, and certainly not in the very near future.  Equally obviously you could at some stage extend the  lease and use that process to change the ground rent or get rid of it completely, but that will cost you because you will have to compensate the freeholder for loss of revenue.

daveyjp

From today.

https://www.bbc.co.uk/news/business-57578060

NameUnavailable

The issue is the lease becoming an AST when the ground rent increases. That will make your position less secure and in turn the lenders.

There are indemnity policies the solicitor could find but the other issue is that the property will be more difficult to sell as an AST, and of course rules and attitudes change all the time.

There are ways around it (lease extension, freehold purchase) but it depends if you can afford them (or in the case of freehold purchase if you can do it anyway).

If you really want to proceed then I guess you need to ask the lenders if they're comfortable with it as is.

Slithery

MidCentury said:

From what I can tell, a Ground Rent of 0.1% or more is generally considered “onerous”, the property price is £285k, so the Ground Rent is below this threshold until the first increase, and may be worth over £400k in 11 years time, so could still be under the threshold.

That's not what the problem is. If the property is outside London then as soon as the ground rent goes above £250 it becomes an AST meaning that failure to pay the ground rent can result in you forfeiting the entire leasehold and ownership reverting to the freeholder. Obviously lenders are unhappy with this as it means that there is a chance that you will still owe the mortgage balance but they are unable to repossess.

Most lenders will require a deed of variation from the freeholder to cap the ground rent at £250 forever so that the situation never arises, the freeholder may want a good chunk of money to agree to this.

MidCentury

Thank you @Slithery @NameUnavailable @daveyjp @bouicca21 I guess all I can do is wait for the valuation survey report to be completed and what NatWest have to say, seems the only info I can find on their website about the lease details is

” In all instances, assessment will be made based on the valuer's comments”

Only hope would probably be the Indemnity Insurance at this point in time, if we do manage to proceed we will definitely look at other options after purchase.

Thanks again!

NameUnavailable

Hi, I'm not sure the valuation survey will take ground rent into account, it's more down to your solicitors (who will probably also be acting for your lenders) to bring it to their attention. You would be better off picking the phone up to the lenders and asking them directly (they will have a company policy on ground rents to adhere to).

MidCentury

Ok @NameUnavailable thank you for the advice, I will contact them tomorrow. Cheers!

MidCentury

Hi again @NameUnavailable

I found some more info in a NatWest guide specifically for New Builds…

”Each case is taken on its own merits so there is no ‘hard and fast’ rule. Generally speaking, if the leasehold doubles every 10 years or starts at a high point then we won’t lend. If it starts low and has reasonable review increases and periods then we may consider. To help us to come to a decision, we require details of the ground rent and service charge. Solicitors have a duty of care to ensure that any leasehold agreement is not onerous for the customer.”

So it could go either way I guess.

MidCentury

Just spoke to NatWest and they confirmed that they don’t have a specific policy, and that they would expect the surveyor to take the lease terms into account when making the valuation, so we are still none the wiser….

kingstreet

The end result here is the surveyor will go out, mention the lease/charges in the report and until your solicitor obtains the terms and supplies them to you to provide to the surveyor, via the lender you'll not have an answer.

There is no mechanism for the surveyor to obtain lease details any other way.