Doubling ground rent

chareth_cutestory

I have a flat that I'm selling which has a 10-year doubling ground rent clause. It was built in 2008 and has therefore doubled once, currently at £250 a year.

I bought it for 101k in 2018, and am currently having issues with my estate agent telling me that the doubling ground rent makes it unmortgageable, but that I should also apply for a deed of variation to remove the doubling clause, or at least tie it to inflation. However, they've also told me that this won't increase the value, nor will it make it mortgageable with anyone other than a specific mortgage broker that they happen to know.

So in this case, what's the point of paying to get a deed of variation? Surely if you remove the one obstacle to getting a mortgage, then it becomes both more mortgageable and more valuable?

Is it worth paying for this or is it even true that banks won't lend against a property with this kind of clause? They've told me that flats on the estate are selling for around £80k which is 20-40 less than they sold for new.

At the same time, other agents have told me that the ground rent is not an issue for most lenders, although the value is still only around about what I originally paid.

Any advice would be greatly appreciated, as all of this seems totally contradictory.

eddddy

I doubt any mortgage lender will lend on a property with ground rent doubling every 10 years.

For example, Nationwide say:

Unacceptable - advise Issuing Office (Will be declined):

- Ground Rent doubles less than every 20 years (e.g. doubles every 5, 10 or 15 years) – acceptable if doubles every 20 years or more
- Ground Rent is compounded RPI

So Nationwide won't accept compounded RPI increases either - but some other lenders allow RPI increases.  

But the buyer might need indemnity insurance because the ground rent will increase above the AST threshold of £250 under the Housing Act 1988 (assuming it's outside London).

See what all the lenders say here: https://lendershandbook.ukfinance.org.uk/lenders-handbook/englandandwales/question-list/1852/

Who was the original developer of your flat? If it was Countryside, Persimmon, or Taylor Wimpey they might vary the lease to RPI ground rent increases at no cost.

NameUnavailable

Doubling ground rent every 10 years is absolutely a problem, as is the ground rent which will be over the £250K threshold in 2028 and becomes an assured tenancy (which puts the leaseholder at risk of forfeiture if the fail to pay ground rent, so lenders don't like it as their security is at risk).

Your solution here is to apply for a FORMAL lease extension which will add 90 years to your lease and reduce the ground rent to zero. You can start the process (and cover all costs) and pass the benefit onto your eventual buyer although as few people seem to understand leasehold it will probably be better to wait until it's done then sell (but you might be looking at a year to complete the process from what I understand).

eddddy

NameUnavailable said:

Your solution here is to apply for a FORMAL lease extension which will add 90 years to your lease and reduce the ground rent to zero. You can start the process (and cover all costs) and pass the benefit onto your eventual buyer although as few people seem to understand leasehold it will probably be better to wait until it's done then sell (but you might be looking at a year to complete the process from what I understand).

As I suggest above, before investigating lease extensions, the OP should check whether the developer is 'voluntarily' varying leases to RPI increases at no cost.

Currently, the developers doing that includes Taylor Wimpey, Countryside and Persimmon, and freeholds owned by Aviva.

(I say 'voluntarily' - but they're volunteering because the Competition and Markets Authority launched enforcement action against them.)

The OP says an EA has talked about varying the lease to RPI increases - maybe the EA is aware of the scheme.

See: https://www.gov.uk/government/news/cma-action-frees-leaseholders-from-costly-contract-terms


Many mortgage lenders currently accept Ground Rents increasing with RPI.

Or the lease will then be cheaper to extend with RPI increases - but a £250 per year ground rent with RPI increases will probably still be quite expensive to extend.


 

tryingmybest99

Edddy's advice is spot on, but another issue to note is that if you are outside of London, the fact that the ground rent is £250 could cause issues for some lenders as there is an odd loophole in a law from 1988 that means if your ground rent is above £250 outside London (or £1000 within London) it can count in some ways as an assured shorthold tenancy instead and if you you get behind on your ground rent, the freeholder can bring you to court and in theory end the lease early under a mandatory order so you and the lender lose your equity in the house. It is completely theoretical and no one has ever lost their property this way but some lenders are wary of this. The easy way to sort it is indemnity insurance for the lender, but if you follow the above advice and get a extension
/ deed of variation it will also sort this issue out.

The benefit of a voluntary extension/ deed of variation over a statutory extension is that it will be done quicker, but if they are not doing this, I think it will be worth it to do the statutory extension or else it will be really hard to get a buyer. (Even if they are a cash buyer they will be thinking about the resale).

But once the issue is sorted you do not need to use the particular broker that the EA has advised, many brokers and lenders will work with a rent rising with RPI.

666666

NameUnavailable said:

Doubling ground rent every 10 years is absolutely a problem, as is the ground rent which will be over the £250K threshold in 2028 and becomes an assured tenancy (which puts the leaseholder at risk of forfeiture if the fail to pay ground rent, so lenders don't like it as their security is at risk).

Your solution here is to apply for a FORMAL lease extension which will add 90 years to your lease and reduce the ground rent to zero. You can start the process (and cover all costs) and pass the benefit onto your eventual buyer although as few people seem to understand leasehold it will probably be better to wait until it's done then sell (but you might be looking at a year to complete the process from what I understand).

@ch@chareth_cutestory if you decide to go the route of extending your lease, from my very limited understanding there is a big change about to happen hopefully this year in relation to lease extension and ground rent. I also only started to pay attention since I'm in the process of buying a leasehold flat.

From my understanding once this new leasehold reform kicks in when you renew your lease it will be automatically renewed for 990 years and the ground rent will be peppercorn or pretty much zero. You will obviously have to cover the cost of renewing the lease but if your remaining lease now is still above 80-90 years it might be worth it to wait for this reform to kick in. From my understanding the cost of renewing lease gets expensive once the lease goes below 80 years you might have to take a look at that I can't remember whether this new reform would also make changes to this 80 years threshold. I watched this youtube video about the new leasehold reform, it's very informative and you also should do your own research to make sure you don't spend money now to extend the lease to 90 years if you can wait for a year or so to get it extended to 990 for the same amount of money.