Ground rent set to increase >£250pa in the next few years and a bit worried

Raneynickel4

In the middle of buying a leasehold flat outside London and the ground rent is currently at £250pa. I know that if the GR goes above £250pa on a flat outside London the lease becomes an AST and lenders don't like this and you could get evicted if you miss GR payments, etc. So I was worried given how the current ground rent is at the threshold.

I got my solicitor to check the ground rent clause on the lease and the clause states that the GR increases every 10 years by 25%. The next increase is scheduled for 2024, and the GR will increase to £312, which is obviously above the threshold. My solicitor said if I want to continue with the purchase she will raise a deed of variation to get the clause changed from a 25% increase to in-line with RPI, and if rejected then I can get indemnity insurance. 

However, I'm now hesitant to buy the flat because
1. AST means I can get evicted if I miss GR payment
2. Presumably it'll be more difficult to get a mortgage due to the GR clause
3. Resaleability will also probably be affected due to point 2 and if I want to sell in the future, it will put off prospective buyers

Has anyone been in this situation in the past? Just wondering if maybe I'm overthinking it and it's not actually as bad as it sounds.

AFF8879

Are there other flats available? Even if your heart is set on this one that would personally make me run a mile, although I’m not really an expert. I just sold a flat in London and the ground rent was only £100

eddddy

Raneynickel4 said:

My solicitor said if I want to continue with the purchase she will raise a deed of variation to get the clause changed from a 25% increase to in-line with RPI, and if rejected then I can get indemnity insurance. 

Is your solicitor missing the point - or maybe I am? 

You say your current ground rent is £250 pa. So an RPI increase in 2024 will take it over £250 pa. So that won't solve anything.


Anyway, FWIW, the government has been talking about leasehold reform for some time now, and one of the planned reforms is to remove the loophole you mention. i.e. a ground rent over £250 will no longer be an 'assured tenancy'.   That may happen before 2024, or it may not.


You also have the option of doing a 'Statutory Lease Extension'. That would reduce your ground rent to zero - but you'd have to pay your freeholder a chunk of cash as compensation. (You could ask a lease extension valuer to estimate the cost of doing that, but there'd probably charge you a fee.)

NameUnavailable

Personally I wouldn't buy it. Yes the Govt. have said they want to close the AST loophole but have yet to actually do anything about it, and with an election looming it's not going to be a priority (especially as a lot of their voters will be landlords as well).

As you have said, the issue is the impact it might have on the value and future saleability of the flat. Assuming it has a sufficiently long lease you don't really want to incur the cost of a lease extension just to remove the ground rent (although that might be worth doing if you really love the place and or the price reflects the cost to extend).

An indemnity policy won't help you when you come to sell.

Raneynickel4

AFF8879 said:

Are there other flats available? Even if your heart is set on this one that would personally make me run a mile, although I’m not really an expert. I just sold a flat in London and the ground rent was only £100

There are other flats that are nice, but they're not as spacious or in as good of a location as this one. Yeah the ground rent is ridiculous! 

eddddy said:

Raneynickel4 said:

My solicitor said if I want to continue with the purchase she will raise a deed of variation to get the clause changed from a 25% increase to in-line with RPI, and if rejected then I can get indemnity insurance. 

Is your solicitor missing the point - or maybe I am? 

You say your current ground rent is £250 pa. So an RPI increase in 2024 will take it over £250 pa. So that won't solve anything.


Anyway, FWIW, the government has been talking about leasehold reform for some time now, and one of the planned reforms is to remove the loophole you mention. i.e. a ground rent over £250 will no longer be an 'assured tenancy'.   That may happen before 2024, or it may not.


You also have the option of doing a 'Statutory Lease Extension'. That would reduce your ground rent to zero - but you'd have to pay your freeholder a chunk of cash as compensation. (You could ask a lease extension valuer to estimate the cost of doing that, but there'd probably charge you a fee.)

Lol, yeah I think she did. I didn't know about the Statutory Lease Extension...but I'm guessing the freeholder can say no to that? Still seems risky. NameUnavailable said:

Personally I wouldn't buy it. Yes the Govt. have said they want to close the AST loophole but have yet to actually do anything about it, and with an election looming it's not going to be a priority (especially as a lot of their voters will be landlords as well).

As you have said, the issue is the impact it might have on the value and future saleability of the flat. Assuming it has a sufficiently long lease you don't really want to incur the cost of a lease extension just to remove the ground rent (although that might be worth doing if you really love the place and or the price reflects the cost to extend).

An indemnity policy won't help you when you come to sell.

Yeah, I think waiting for the Govt. to close the AST loophole is very risky like you said. If this was my forever flat then maybe it wouldn't be such a dealbreaker, but I'm a FTB and will probably move to a different place in 5-10 years so I didn't want to be stuck with it. 

user1977

Even if there isn't wholesale revamp of leasehold law, I would think it likely that those limits will at least be tweaked in the medium term to take account of inflation since whenever they were originally put in place.

AdrianC

Even if it is going to hit the AST cap, then all you need to do is to go through the statutory lease extension process, and add 90 yrs plus peppercorn ground rent.

That may not be cheap, though, because of the ground rent amount.

Raneynickel4

AdrianC said:

Even if it is going to hit the AST cap, then all you need to do is to go through the statutory lease extension process, and add 90 yrs plus peppercorn ground rent.

That may not be cheap, though, because of the ground rent amount.

So an online calculator tells me £5000, and need to save that before 2024 which is doable. I guess my main concern is if the freeholder can deny the lease extension process? And does extending the lease always convert it to peppercorn ground rent? Or can the lease be extended without changing the ground rent to peppercorn?

princeofpounds

This situation is totally solvable. It's just a question of at what cost and effort, and who pays!

- Deed of variation is the simplest route. It's just a private negotiation between the freeholder and your solicitor (or the vendor's if they choose to do it). Switch from an escalating ground rent to fixed for a sum of money. Deduct that expense from your offer. The freeholder can just refuse if they like.

- Indemnity insurance - things may have changed over the last couple of years, but this is not a perfect solution. Last time I looked not all lenders would accept it, so it leaves you with a restricted range of lenders. Better than nothing, but not a full solution.

- Statutory lease extension. The freeholder cannot ultimately refuse this if you are prepared to go to Tribunal. The ground rent will be set to zero. However the cost will be higher as you are paying for things you don't necessarily need (moving ground rent to zero rather than just preventing escalation, and of course extending the lease term by 90 years). You may want to do those things anyway - it can be a good investment - but they are not necessary. The vendor is also unlikely to be willing to pay for the full cost of this for the same reason.

Of course you may pursue this route only to find that leasehold reform eventually arrives sometime in the next parliament (don't bet on it!) and the whole workaround looks a bit silly in hindsight.

If I were you, I would pursue the Deed of Variation first and see whether I wanted to adjust my offer based on that potential cost. There is no need to back out at this stage if you like the property otherwise.

Raneynickel4

princeofpounds said:

This situation is totally solvable. It's just a question of at what cost and effort, and who pays!

- Deed of variation is the simplest route. It's just a private negotiation between the freeholder and your solicitor (or the vendor's if they choose to do it). Switch from an escalating ground rent to fixed for a sum of money. Deduct that expense from your offer. The freeholder can just refuse if they like.

- Indemnity insurance - things may have changed over the last couple of years, but this is not a perfect solution. Last time I looked not all lenders would accept it, so it leaves you with a restricted range of lenders. Better than nothing, but not a full solution.

- Statutory lease extension. The freeholder cannot ultimately refuse this if you are prepared to go to Tribunal. The ground rent will be set to zero. However the cost will be higher as you are paying for things you don't necessarily need (moving ground rent to zero rather than just preventing escalation, and of course extending the lease term by 90 years). You may want to do those things anyway - it can be a good investment - but they are not necessary. The vendor is also unlikely to be willing to pay for the full cost of this for the same reason.

Of course you may pursue this route only to find that leasehold reform eventually arrives sometime in the next parliament (don't bet on it!) and the whole workaround looks a bit silly in hindsight.

If I were you, I would pursue the Deed of Variation first and see whether I wanted to adjust my offer based on that potential cost. There is no need to back out at this stage if you like the property otherwise.

Thanks for coming up with potential solutions, but that's -a lot- of effort for a flat that I like but I'm not in love with. Even if I get a statutory lease extension, I presume the tribunal will take a long time and I'd have to pay to extend the lease very soon which I'd rather not do. For a forever home the benefit probably outweighs the effort, but for this flat? I'm not sure it's worth it.

AdrianC

Raneynickel4 said:

AdrianC said:

Even if it is going to hit the AST cap, then all you need to do is to go through the statutory lease extension process, and add 90 yrs plus peppercorn ground rent.

That may not be cheap, though, because of the ground rent amount.

So an online calculator tells me £5000, and need to save that before 2024 which is doable. I guess my main concern is if the freeholder can deny the lease extension process? And does extending the lease always convert it to peppercorn ground rent? Or can the lease be extended without changing the ground rent to peppercorn?

Statutory route - the clue is in the name. So long as you follow the process, it is set down in law. +90yrs, peppercorn.

Will it add £5k to the value? Almost certainly.