Ground Rent Review Mechanism

Ctlaw_

Hi, we are the in process of buying a leasehold flat. Our solicitor told us that the ground rent review mechanism is based on a % of the market value of the flat, which is not  an industry standard method of review (which is usually linked to the pricing index).  He said he is not sure if such review mechanism will be acceptable to the lenders and advise us to seek help from mortgage specialists.
May I know get some advice on this? We do not use mortgage so have no contact with mortgage specialists or lenders.
Thank you!

csgohan4

So you don't need a mortgage?

What exactly are the ground rent review? need more info

user1977

Being linked to the property value seems to make more sense than linking it to general retail prices. Probably a bigger issue is whether it's likely to get above the relevant limits for becoming an AST (£1000 in London, £250 elsewhere). What is the current rent and when is the next review?

Ctlaw_

Thanks. Yes we don't need a mortgage.
As stated in the lease, the ground rent is adjusted every 20 years, and will be revised based on % of current value of flats in the building.
The solicitor said most ground rent is changed based on the Retail Price Index, hence the review mechanism for this flat is uncommon.

Ctlaw_

user1977 said:

Being linked to the property value seems to make more sense than linking it to general retail prices. Probably a bigger issue is whether it's likely to get above the relevant limits for becoming an AST (£1000 in London, £250 elsewhere). What is the current rent and when is the next review?

Thanks for pointing out about the AST.
Currently it's £200 and the next review is 2024.
I did ask my solicitor about his but he seems not very concerned hat it may exceed £250
May I get more advice on this ?

user1977

Ctlaw_ said:

user1977 said:

Being linked to the property value seems to make more sense than linking it to general retail prices. Probably a bigger issue is whether it's likely to get above the relevant limits for becoming an AST (£1000 in London, £250 elsewhere). What is the current rent and when is the next review?

Thanks for pointing out about the AST.
Currently it's £200 and the next review is 2024.
I did ask my solicitor about his but he seems not very concerned hat it may exceed £250
May I get more advice on this ?

When was it set at £200? If property prices have gone up by 25% in the period from then to 2024, you'll be at over £250 (and assuming Parliament doesn't get round to updating the £250 limit in the meantime) then I'd expect mortgage lenders would have an issue - obviously that involves a bit of crystal ball-gazing.

Ctlaw_

user1977 said:

Ctlaw_ said:

user1977 said:

Being linked to the property value seems to make more sense than linking it to general retail prices. Probably a bigger issue is whether it's likely to get above the relevant limits for becoming an AST (£1000 in London, £250 elsewhere). What is the current rent and when is the next review?

Thanks for pointing out about the AST.
Currently it's £200 and the next review is 2024.
I did ask my solicitor about his but he seems not very concerned hat it may exceed £250
May I get more advice on this ?

When was it set at £200? If property prices have gone up by 25% in the period from then to 2024, you'll be at over £250 (and assuming Parliament doesn't get round to updating the £250 limit in the meantime) then I'd expect mortgage lenders would have an issue - obviously that involves a bit of crystal ball-gazing.

£200 was set when it was a new built in 2003. The price of the flat today is flat vs that time.  
Based on the same historical trend, it seems not very likely it can be up by 25% in the next three years. But who knows what will happen. 
I realize that the rent of many leasehold apartments is close or already exceeds £250. So, other than avoiding these apartments, are there other solutions/ suggestions?

NameUnavailable

How does the freeholder determine the 'market value' for the review? I'm guessing they'd have to get a formal valuation and that will be charged back to you under the service charge. 

If the ground rent increases above £250 (outside of greater London) then it will become a problem if/when you want to sell (both the review terms and the GR being over £250 are problems for many lenders).

How long is the lease? The other option is to start a formal lease extension (your vendor can do this and you carry it on, or you need to wait for 2 years to start it yourself) and that will reduce the ground rent to zero.

Ctlaw_

NameUnavailable said:

How does the freeholder determine the 'market value' for the review? I'm guessing they'd have to get a formal valuation and that will be charged back to you under the service charge. 

If the ground rent increases above £250 (outside of greater London) then it will become a problem if/when you want to sell (both the review terms and the GR being over £250 are problems for many lenders).

How long is the lease? The other option is to start a formal lease extension (your vendor can do this and you carry it on, or you need to wait for 2 years to start it yourself) and that will reduce the ground rent to zero.

Yes, there should be a formal valuation to determine the market value. 
The remaining lease is 970+ years. My solicitor also mentioned about the formal lease extension but given the long remaining lease, does this apply to my case? Would it be very costly to do so? Where could I obtain a quote for this and understand more the potential cost involved? 

user1977

NameUnavailable said:

How does the freeholder determine the 'market value' for the review? I'm guessing they'd have to get a formal valuation and that will be charged back to you under the service charge. 

It ought not to be a service charge cost, given it's not a service and purely for the interest of the freeholder. The leaseholders may of course want to argue the point and get their own valuation. The lease should explain the mechanism for agreement, presumably with reference to an independent third party if there's a dispute.

Ctlaw_

user1977 said:

NameUnavailable said:

How does the freeholder determine the 'market value' for the review? I'm guessing they'd have to get a formal valuation and that will be charged back to you under the service charge. 

It ought not to be a service charge cost, given it's not a service and purely for the interest of the freeholder. The leaseholders may of course want to argue the point and get their own valuation. The lease should explain the mechanism for agreement, presumably with reference to an independent third party if there's a dispute.

The lease states that the leasehold can disagree to the proposed rent and then a chartered surveyor would be appointed, the cost of which will be equally shared between the landlord and the leaseholder. I think this should be OK?