Extending a Lease

ph_mac

I am thinking of buying a flat with a 986 years left on the lease. Ground rent (currently £400) is linked to the retail price index and is up for review in two years so it is going to rise.

I am aware of the changes that may come in regarding ground rent but want to know: is it possible to extend a 986 year lease to reduce ground rent to zero?

Can the lease be extended to 999 years or to over 1,000 years?

Thanks

eddddy

Is the ground rent linked to RPI for the full 986 years?

If so, I think it might be eye-wateringly expensive to extend the lease - and reduce the ground rent to zero. I'd guess it might cost hundreds of thousands. 

(Because you'd have to compensate the freeholder of 986 years of lost ground rent which will be increasing with RPI)

Even if the RPI increases finish after, say, 100 years - it might still cost be tens of thousands to extend the lease.



Tbh, I think I'd want to talk to an experienced lease extension valuer about this before buying - but they typically charge £500 to £800 for a valuation. Maybe phone one or two and just ask about a £400 ground rent linked to RPI for 986 years - and see if they'll comment.

Or maybe see if there are any tribunal cases with similar escalating ground rents - and see what cost the tribunal decided.

eddddy

Jatinder34 said:

By my experience, i would say that you must buy your flat even if the lease length is 986 years. But instead you must contact an experienced xxxxxxxxxxx for such queries, they will suggest the best option that will be cost effective and time saving for you. If you want to have a general estimate you can also have a general estimate of the cost by using a online free lease extension valuation calculator.

Your post contains a link to a company's website.

It looks very much like you are promoting / advertising that company. 

Advertising isn't allowed in this forum.

Are you connected to that company?

Slithery

eddddy said:

Are you connected to that company?

Seeing as how all of the testimonials on that site are thanking a Jatinder I'd say there's a pretty good chance...

Reported as spam for deletion.

MaryNB

eddddy said:

Jatinder34 said:

By my experience, i would say that you must buy your flat even if the lease length is 986 years. But instead you must contact an experienced xxxxxxxxxxx for such queries, they will suggest the best option that will be cost effective and time saving for you. If you want to have a general estimate you can also have a general estimate of the cost by using a online free lease extension valuation calculator.

Your post contains a link to a company's website.

It looks very much like you are promoting / advertising that company. 

Advertising isn't allowed in this forum.

Are you connected to that company?

I recognised that poster's name almost immediately. I reported them months ago for the same thing.

There's a Jatinder on companies house at the same address as that company

https://www.leaseholdvaluations.com/contact-us/
https://find-and-update.company-information.service.gov.uk/officers/ZbG7xfrV6pzZLDo8WaryPamLKAY/appointments

princeofpounds

eddddy said:

Is the ground rent linked to RPI for the full 986 years?

If so, I think it might be eye-wateringly expensive to extend the lease - and reduce the ground rent to zero. I'd guess it might cost hundreds of thousands. 

(Because you'd have to compensate the freeholder of 986 years of lost ground rent which will be increasing with RPI)

No it doesn't work like that eddddy. You're forgetting that in a valuation future ground rent payments must be discounted to the present day by a discount rate that represents the lower time value of money for payments further out in future. 

It will be considerably more expensive than it would be if it were a flat ground rent in nominal terms, but nothing crazy. In fact I would guesstimate that the discount rate is similar to the RPI forecast and so the ground rent will be regarded as flat in real terms (which is basically the whole idea of an inflation-linked escalaction after all). So the value of the escalating income stream will be something similar to the valuation of a perpetual income stream discounted at an appropriate real terms discount rate, something like £400 / 5% = 8k.

OP - yes once you are eligible (after 2 years unless the seller starts the process for you, and assuming you meet the criteria which you probably do) then you can apply for a statutory lease extension of 90 years which will set the ground rent to zero.

You will pay almost nothing for the extension of the lease term, as getting an extra 90 years in a millennium is basically worthless. The main component of the valuation will be the ground rent redemption. And then legal fees on top.

eddddy

princeofpounds said:

No it doesn't work like that eddddy. You're forgetting that in a valuation future ground rent payments must be discounted to the present day by a discount rate that represents the lower time value of money for payments further out in future. 

It will be considerably more expensive than it would be if it were a flat ground rent in nominal terms, but nothing crazy. In fact I would guesstimate that the discount rate is similar to the RPI forecast and so the ground rent will be regarded as flat in real terms (which is basically the whole idea of an inflation-linked escalaction after all). So the value of the escalating income stream will be something similar to the valuation of a perpetual income stream discounted at an appropriate real terms discount rate, something like £400 / 5% = 8k.

I think you've confused yourself.

You've misunderstood the impact of RPI, meaning that your calculation is massively incorrect.

If the ground rent was fixed at £400 for 986 years - your calculation of about £8k would be correct for the lease extension.


But the ground rent increases with RPI, which makes a huge, massive, enormous difference.

Using your assumption that the discount rate is the same as RPI - it would cost about £390k for the lease extension.

Essentially, your mistake was to apply a discount rate twice - you should have only applied it once.


Because, in slightly simplified terms

• The ground rent starts at £400
• Each year's future ground rent payment is inflated by RPI
• It is then discounted by the same amount to give a present day value of £400

To illustrate, let's look at year 100 of the lease - and assume a discount rate and RPI of 5%

• The ground rent would be £400 inflated by 100 years of RPI increases - so the ground rent in year 100 would be £52,600
• If you discount £52,600 over 100 years to present day value it would be £400

i.e. If you do all the calculations, the present day value of every year's ground rent is £400 - so the total present day value of the ground rent is £390k



In reality, the lease extension will probably cost a bit less than £390k - but the reasons get a bit more complex.