Leasehold extension cost

Shed1234

I have had an offer accepted on a flat in London which has a healthy lease length (117 years) but it turns out it has a doubling ground rent clause (which seems like an absolute con!):

Lease length: 125 years
Years remaining: 117 years
Ground rent: £300p.a. doubling every 20 years
Market value of property £550,000

Even now, the statutory cost of extending the lease will be quite significant and this will only increase as the years tick by (given you are essentially buying out the discounted future cash flows of the ground rent + reversion+ fees). Has anyone found a decent online lease extension calculator that is sophisticated enough to deal with doubling ground rents? I don't know what is a reasonable discount rate to use in my own excel calculation!

It seems like some new legislation may be on the horizon making it cheaper for existing leaseholders to extend leases and that legislation has passed recently minimising ground rent clauses in new lease agreements.

My concern is that when I come to sell in 5/6 years: i) the cost of extension will affect value (and banks/solicitors may be more wary of this); and ii) if legislation is not passed for existing leaseholders, this flat will essentially be a second class asset

Perhaps I'm over thinking it given the lease length and someone with a less mathematical background will buy it in 5/6 years time but any advice is appreciated!

arthurdick

Hi, not sure if this helps with what you need but I have always found it a good rough estimate.

https://myleasehold.co.uk/lease-extension-calculator/

this is how they work out Ground rent estimate

Ground rent (per annum in £)

The ground rent you pay annually to your freeholder. This may be a rising amount (e.g. £100 per annum for the first 33 years, £200 per annum for the next 33 years, and £300 per annum for the remainder of the term), however you can enter the average or mid-range amount here. Please note that some leases are subject to onerous ground rents and this will need to be investigated further.

Shed1234

Thanks - Using an average GR of £3,792, this suggests an eye watering premium, now, of 55k - 65k. Although this will likely be an over estimate (given the average gives more value to the higher future GRs which will be discounted the most), I clearly should factor this into my valuation as it will only get more expensive to extend.

It is quite surprising that these doubling GR clauses didn't get picked up by banks/solicitors when first introduced and I have a lot of sympathy for people who are stuck on more aggressive 10 year doubling clauses, albeit some freeholders are changing these clauses retrospectively because of public pressure.

I think I either need to i) Ask the freeholder whether they will vary the lease and cap the GR; ii) See whether the freeholder has made any informal extension offers to leaseholders (some flats in the building have extended on to 999 year leases); or iii) Negotiate a lower price/walk away

eddddy

Shed1234 said:

I don't know what is a reasonable discount rate to use in my own excel calculation!

The discount rate (or capitalisation rate) for ground rents is usually between 5% and 8%.

It's meant to reflect what the ground rent could be sold for at auction - so it varies based on the 'desirability' of the ground rent as an investment.


Based on the info you've mentioned on your lease, I make the discounted ground rent could be worth one of the following figures (but maybe check my numbers) :

8% Capitalisation Rate = £6.3k
7% Capitalisation Rate = £7.9k
6% Capitalisation Rate = £10.6k
5% Capitalisation Rate = £15.4k

So you could put your lease details into an online calculator using a ground rent of zero - and then add one of the numbers above to the result.



Edit to add:

But there have been cases where Tribunals have agreed to rates as low as 3.5% - which would mean: 

3.5% Capitalisation Rate = £32k

Shed1234

Very helpful thanks