How does rising ground rent impact leasehold extension / property value?

pptdgc

I am in the process of buying a Leasehold flat (In Brighton) and I originally understood the ground rent to be fixed at £225 per annum.

I have now come to understand that the ground rent increases by 150% every 25 years which I wasn't originally aware of. There are just over 106 years left on the lease.

This means the ground rent would look something like this:

Whilst I probably wouldn't get to a point where I was paying £506.26 or more (I would probably sell or extend the lease before then), I do have some concerns and queries:
- I'm concerned that when I come to sell, this will be less appealing to buyers. I'm wondering how common this is with leasehold flats?
- I understand the premium for extending the lease would now be a lot more than I first thought. I'm wondering how could I work out an estimate with a leasehold calculator. All of the ones I find seem to be based on the current ground rent and do not take into account rising ground rents. This one for example https://www.lease-advice.org/calculator/
- I'm wondering if this will have any impact on the value of the property?

Thanks

DullGreyGuy

Escalating ground rents are common and they are becoming more problematic. 

Based on todays figures a ground rent of over £250 for a property outside london enables the freeholder to treat it like an assured tenancy making it much easier for them to reclaim the property if you get into arrears which means mortgage companies increasingly are uncomfortable with it. 

user1977

That's only a 50% increase every 25 years rather than a 150% increase - which is a fair bit below typical inflation levels (consider that £100 in 1980 would now be worth £383). It will increase the price a bit but it's not as problematic as e.g. doubling every 10 years.

As mentioned, the £250 limit is potentially an issue, but only if nobody gets around to changing that by 2030.

pptdgc

Thanks both for the responses. My solicitor sent the following to me from my lender's handbook: 

"We have no objection to a lease which contains provision for a periodic increase of the ground rent provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable. If you consider any increase in the ground rent may materially affect the value of the property, you must report this to us"

So from the above, I understand that it's not a problem for my approved mortgage, but could potentially be a problem when I come to re-mortgage?

Could somebody explain to me what the £250 limit means in detail? What would need to change, so this has no impact?

Thanks

eddddy

pptdgc said:

Could somebody explain to me what the £250 limit means in detail? What would need to change, so this has no impact?

It's generally agreed that there was an unforeseen problem (or mistake) in the Housing Act 1988. 

In simple terms, if you have a leasehold property and your ground rent is over £250 outside London (or over £1000 in London) and you you are 3 months late paying your ground rent, your landlord/freeholder can relatively easily repossess your property - with no compensation. (It's called forfeiting the lease.)


The government is aware of the issue, and have been talking about reforming the Housing Act to correct the 'mistake'. But no date has been set yet.

This situation scares mortgage lenders (as well as potential buyers). If the property is repossessed - the mortgage lender no longer has security for their loan. But many mortgage lenders will accept indemnity insurance.

user1977

Or the "proper" solution is to agree a variation with the freeholder so that the rent is capped at £250 (or something less) - but they'd want suitable compensation for that.

NameUnavailable

There are 3 things to consider with ground rent. If it increases, how often and by how much. Some lenders have a limit on the amount of ground rent as a percentage of the value of the property (i.e. no more than 1%). But in addition there is also the problem mentioned above that a ground rent of more than £250 outside of London means the lease is an AST and is a problem for lenders in that a freeholder can forfeit the lease if ground rent is unpaid.

Even if your lender approves the mortgage now, it may be more of problem when you come to sell. Also the lenders only seem to check the details at the last minute - you don't want to spend money on surveys and searches to find they pull the offer at the last minute, so I would ask them to confirm now that they are happy with the terms if you intend to proceed.

eddddy

pptdgc said:

- I understand the premium for extending the lease would now be a lot more than I first thought. I'm wondering how could I work out an estimate with a leasehold calculator. All of the ones I find seem to be based on the current ground rent and do not take into account rising ground rents. This one for example https://www.lease-advice.org/calculator/

The impact of the escalating ground rent you've described should probably add between £1,300 and £1,800 to the cost of the lease extension.


i.e. Put the details into a lease extension calculator with a fixed ground rent of £225.

The calculator should give you a range with a lower number and an upper number. Add £1,300 to the lower number and £1,800 to the upper number. 

pptdgc

eddddy said:

pptdgc said:

- I understand the premium for extending the lease would now be a lot more than I first thought. I'm wondering how could I work out an estimate with a leasehold calculator. All of the ones I find seem to be based on the current ground rent and do not take into account rising ground rents. This one for example https://www.lease-advice.org/calculator/

The impact of the escalating ground rent you've described should probably add between £1,300 and £1,800 to the cost of the lease extension.


i.e. Put the details into a lease extension calculator with a fixed ground rent of £225.

The calculator should give you a range with a lower number and an upper number. Add £1,300 to the lower number and £1,800 to the upper number. 

Thank you, when I use £225 it comes out at between £5000 and £7000 for the premium.

Adding on the values you mention above it comes to £6300 to £8,800. not as bad as I thought.

What I'd previously been doing is taking an average of the ground rent based on what was payable over the remaining years on the lease. That was coming out at between  £12000 and £15000 which is much worse than the above (perhaps this was the wrong way to do it)

How much would I need to add for legal fees (mine and the freeholder).. about £5k?

eddddy

pptdgc said:

What I'd previously been doing is taking an average of the ground rent based on what was payable over the remaining years on the lease. That was coming out at between  £12000 and £15000 which is much worse than the above (perhaps this was the wrong way to do it)

Yes - averaging the ground rent in that way won't give a sensible answer. You have to consider "The time value of money".

i.e. if I offered you the the choice of 2 things:

1. £1,139 paid in 1 year's time
2. £1,139 paid in 100 year's time

... you would find option 1 much more valuable than option 2. So it's not sensible to do a simple average of payments due in 1 year with payments due in 100 years.

pptdgc said:

How much would I need to add for legal fees (mine and the freeholder).. about £5k?

£5k seems reasonable. If the freeholder doesn't make any fuss, it could be less. If it turns into a real fight and goes to tribunal, it could be more.


The government are discussing leasehold reforms - but they've been discussing them for years, and no dates have been set yet. However, their discussions include:

• Simplifying the lease extension process to significantly reduce the fees

• Allowing an alternative option of "buying out" the ground rent to reduce it to zero, without extending the lease. (So it should be cheaper than a lease extension.)

So you might (or might not) want to buy the flat and wait a while to see if those things happen (assuming your mortgage lender is happy with the lease terms as they are now).

pptdgc

@eddy thank you for explaining - that all makes sense. At least the lease extension wouldn't be quite as much as I first thought. If I do go ahead I think I'd wait a while to see if the government actually do anything to improve the process and reduce the fees.

Thanks again