Escalating ground rent - would you buy?

Mimi123456

Hello everyone,

I am a first time buyer and am in the process of buying a 1-bed flat in London.
my solicitor pointed out that the lease contract contains escalating ground rent provision as follows:

• £250 per annum until 2038
• £500 per annum until 2063
• £1000 per annum until 2088
• £2000 per annum until 2113
• Thereafter £4000 pa plus index linked review every 25 years

The remaining lease term is 990yrs. 

I’m sure it will be ok with the lender given it doubles every 25yrs (they usually hesitate if it’s every 10yrs or so) and will only exceed £1000 beyond mortgage term.

However I’m wondering what the risks for me are. Would it put off buyers few years down the line when I decide to sell the flat and upsize?

Would you buy such a flat?

Any views would be much appreciated!

Chris_English

That's an increase of 2.8% per year, starting in 2038, which (in my opinion) is perfectly reasonable.

Someone else can hopefully remind me of at what price per year the rules change regarding the right tio extend your lease, but other than that, I don't think that it's unfair; it's broadly in line with inflation expectations.

Mimi123456

Thank you very much for your response Chris!
yes, the rate of increase is reasonable. But there has been so much bad press on ground rents and apparently there is a Bill on theway to ban ground rents for new leases. So I’m just wondering if say 5 years from now when new builds have leases without ground rent my flat will have any appeal to potential buyers.

or am I just overreacting? As someone who is new to property buying process it’s hard to say whether it’s normal to have such provisions in your lease. When I asked a couple of friends but they bought ex-council so their rent is near ‘peppercorn’ amount so they never bothered with this question

user1977

Mimi123456 said:

there has been so much bad press on ground rents and apparently there is a Bill on theway to ban ground rents for new leases. So I’m just wondering if say 5 years from now when new builds have leases without ground rent my flat will have any appeal to potential buyers.

If new ground rents are outlawed, I expect that would simultaneously come with a means of compulsory acquisition of any remaining ground rents. So probably not a concern in the long term.

Chris_English

Mimi123456 said:

Thank you very much for your response Chris!
yes, the rate of increase is reasonable. But there has been so much bad press on ground rents and apparently there is a Bill on theway to ban ground rents for new leases. So I’m just wondering if say 5 years from now when new builds have leases without ground rent my flat will have any appeal to potential buyers.

or am I just overreacting? As someone who is new to property buying process it’s hard to say whether it’s normal to have such provisions in your lease. When I asked a couple of friends but they bought ex-council so their rent is near ‘peppercorn’ amount so they never bothered with this question

You can work out how much the present value is of all the future ground rent payments, and compare it to the future costs of a fixed sum, and the difference probably gives you a decent estimate of how much difference it could make.

Of course, if increases get banned, it may well mean that the new fixed cost just starts off higher than the current variable one does.

If we look at the present value of the next 100 years of ground rent, discounting future amounts at 2% a year (the current inflation target), then your increasing ground rent is a present-day cost of £35,000, compared to a flat £250 per year for 100 years having a present-day cost of £250.

If we instead assume that someone would pitch the flat amount at £400 (just a finger in the air amount from me) then the current value of that over the next 100 years is £17,600.

Is that going to put off a prospective buyer? I've no idea...

bouicca21

If necessary once you have owned for 2 years you can apply for an extension to the lease that will kill the ground rent. But it will cost.  Mine is similar but capped at £1000.  I calculate the cost of getting rid of the ground rent to be in the order of £10,000.  

Personally I’d be reluctant to buy anything with a ground rent that goes over £1000.  Other potential buyers may well feel the same.

[Deleted User]

It's a scam and will probably be illegal eventually. Best avoided, even if you are willing to pay it many buyers are not. Will be a problem when you come to sell.

propertyhunter

I have a specific dislike of these clauses. I had a similar ground rent clause (doubled every 25 years, starting from a base of £395). I sold my flat last year, but the buyer didn't give too hoots about the ground rent despite being aware of the implications. The mortgage company wanted an indemnity for it though. The sale wasn't a problem.

Has the freeholder ever been known to remove the doubling ground rent clause I wonder? Perhaps try asking them if they would be open to it, and if so, then ask the current owner to start the process for a deed of variation that you can continue with once you acquire the property (rather than wait 2 years of owning it). A buyer in my old block of flats tried that - didn't work for them, but at least you can try. 

Chris_English

[Deleted User] said:

It's a scam and will probably be illegal eventually. Best avoided, even if you are willing to pay it many buyers are not. Will be a problem when you come to sell.

How’s it a scam?

tryingmybest99

There's two potential issues you need to be aware of under the current laws/ mortgage company policies:
1. Mortgage companies are wary of "onerous" ground rents. For some this is a ground rent that is 0.1% of the property value or more. For many, anything above 0.2% is definitely an issue.
2. If ground rent goes above £250 a year (or in London where you are £1,000 a year), the leasehold becomes an assured tenancy in some respects due to a loophole in the law from an act from 1988. This means if you fail to pay your ground rent the freeholder can start a mandatory court order to to claim back the flat, which is a risk for the mortgage company. Most will proceed if you get indemnity insurance for them, but that doesn't cover the leaseholder; if for any reason the leaseholder doesn't pay the ground rent before the court date the court has to hand the flat back to the freeholder.

For you, point 2 is a non issue as this won't happen for more than 40 years. Point 1 depends on the value of the property.

Either way, the issues can be solved with a statutory lease extension (you will have to pay premium plus your own legal costs and the freeholders legal costs. It is difficult to calculate the exact amount with rising ground rents). Statutory lease extensions extend the lease by 90 years and reduce ground rent to zero. You could also ask for a deed of variation from the freeholder to get rid of the ground rent but they can refuse. 

There is legislation coming in this year that will prevent ground rent on new leases. It is worth noting that this is not retroactive so if you sign a lease now, ground rent still applies. Also for voluntary (non-statutory) lease extensions, ground rent will still apply until the end of the current lease term.

However the government has promised more legislation that will make statutory extensions easier and cheaper. Fingers crossed that happens. I wish they'd close the loophole about the 1988 law as well!

I have just bought a flat with a ground rent rising with RPI. I am not sure it was a great idea but I have plans to complete a statutory extension in two years when I have the right to and it is likely to cost me about £10,000.

Mimi123456

Thank you all very much for your thoughts.

yeah I had a feeling it will not go down well with many prospective buyers in the future. My solicitor said that for the bank we will be getting the indemnity insurance. 

I tried to work out the cost of extending it by 90yrs and given 990yrs remaining and the escalation of rent I get some crazy premium like £50k ////

I’m so deep in the process now that I’m looking at £4000 in fees if I pull out. But I guess still cheaper than problems down the line