Doubling ground rent every 25 years on a leasehold flat - should this be a dealbreaker?

FTBLondonHelp2022

I am going through the process of purchasing a leasehold flat in London. I've found some concerning details about the ground rent, even though there are 990 years left on the lease

Under the terms of my lease agreement, the ground rent is currently £350.00 per annum and rises as follows:

£350 for the first 25 years of the Term;

£700 for the next 25 years of the Term;

£1,400 for the next 25 years of the Term;

£2,800 for the next 25 years of the Term;

£5,600 for the next 25 years of the Term; and

£11,200 for the remainder of the Term.

Considering the recent legislation reducing ground rents of new build flats to peppercorn values, should I avoid the purchase of this flat completely? I'm worried about the resale value...

FlimFlam01

IMO, factoring in inflation and the time between increases it doesn't look terrible on the face of it.

rigolith

It will put buyers off when you come to sell. Personally I'd avoid it.

zagubov

It's increasing by around 3% per year which has been not too far from the usual  inflation rate apart from the recent low-inflation period we just went through.
If it was doubling faster than this you'd definitely be worried.
Might want to ask mortgage providers if this is okay.
As you move up the housing ladder inside/outside London this may not be a very long-term problem.

FTBLondonHelp2022

I'm planning on keeping this flat for a minimum of 15 years most likely 20+ so the resalability is a real concern for me....

NameUnavailable

The issue is when the ground rent exceeds £1000 the lease becomes an AST which means that late payment of ground rent can enable the freeholder to revoke the lease and take possession of the property.

Mortgage lenders don't like this as it affects their security so whilst it's not a problem now, it could become a problem in the future which would affect the value and saleability of the remaining lease - you are buying a lease not a property - (and they will be considering if it will increase during the term of any mortgage applied for).

It's possible that rules might change but then again they might not.

eddddy

FTBLondonHelp2022 said:

I am going through the process of purchasing a leasehold flat in London. I've found some concerning details about the ground rent, even though there are 990 years left on the lease

Under the terms of my lease agreement, the ground rent is currently £350.00 per annum and rises as follows:

£350 for the first 25 years of the Term;

£700 for the next 25 years of the Term;

£1,400 for the next 25 years of the Term;

£2,800 for the next 25 years of the Term;

£5,600 for the next 25 years of the Term; and

£11,200 for the remainder of the Term.

Considering the recent legislation reducing ground rents of new build flats to peppercorn values, should I avoid the purchase of this flat completely? I'm worried about the resale value...

Under the current legislation, it might cost between £8k to £12k (plus fees) to extend the lease in order to get a peppercorn ground rent. Say £10k to £15k in total.

If/when the leasehold reforms happen, that might reduce the cost by £2k to £4k.

So if you aim to pay £10k to £15k less than for a similar flat with a peppercorn ground rent, that might be reasonable.


But there are a few anecdotes about mortgage lenders occasionally refusing ground rents that double every 25 years, but I don't know if they're reliable anecdotes (or misunderstandings about the reasons for refusal).

There's the issue of ground rent potentially exceeding £1000 - but that shouldn't be a problem if it doesn't occur within the lifespan of the mortgage. And even if it does occur with the mortgage lifespan, lenders all seem to accept indemnity insurance for that.

user1977

FTBLondonHelp2022 said:

I'm planning on keeping this flat for a minimum of 15 years most likely 20+ so the resalability is a real concern for me....

In which case we're crystal ball-gazing about what the market will be like by then. I expect there'll be further leasehold reform. I expect the £1000 assured tenancy issue will have been removed before too long.

RiskAverse100

To find out what lenders' requirements are on ground rents, the place to look is the UK Finance Lenders' Handbook.

You want to select England and Wales and I would suggest then selecting Nationwide Building Society as the lender.

Then select Part 2 only.

5.14.9 is the relevant section and if you click on 'view all answers to this question' you can find out what all the UK Finance lenders' requirements are.  They vary considerably and cause solicitors real headaches.  If only all lenders would agree to the same requirements!

eddddy

RiskAverse100 said:

To find out what lenders' requirements are on ground rents, the place to look is the UK Finance Lenders' Handbook.

You want to select England and Wales and I would suggest then selecting Nationwide Building Society as the lender.

Then select Part 2 only.

5.14.9 is the relevant section and if you click on 'view all answers to this question' you can find out what all the UK Finance lenders' requirements are.  They vary considerably and cause solicitors real headaches.  If only all lenders would agree to the same requirements!

I think you mean this page: https://lendershandbook.ukfinance.org.uk/lenders-handbook/englandandwales/question-list/1852/

All the lenders say 25 yearly doubling is acceptable, but as I say, there are some anecdotal examples of people claiming otherwise. But I'm not sure how reliable the anecdotes are.

Barclays turns down mortgage on flat where ground rent doubles every 25 years

https://www.leaseholdknowledge.com/barclays-turns-mortgage-flat-ground-rent-doubles-every-25-years/

Unfortunately at the start of April the buyer has had his mortgage offer pulled because his mortgage company did not like the ground rent clause of our flat which doubles every 25 years (or increases to 0.1% of properties value, whichever is higher). 

https://forums.moneysavingexpert.com/discussion/6142286/help-buyer-had-their-mortgage-withdrawn-due-to-ground-rent

From what I can gather, this is because of the lease documents stating that ground rent will double every 25 years.

https://forums.moneysavingexpert.com/discussion/5985501/mortgage-offer-withdrawn

Mimi123456

I pulled out of a purchase last year because of this. Was also ~990yrs and doubling every 25yrs. But my solicitor at the time said he didn’t think it was a good reason and most people would just brush it off minor irritation and press ahead. 
But also looking back I thought the flat was too expensive and after all I wasn’t sure if I liked it that much.

So depending on how much you like it you can consider your options. 

In my case lender (barclays) were fine to go ahead even without the indemnity policy for doubling rent. But I worried about the scandal around these types of provisions for ground rent escalating in the press and whether it could put off buyers in the future. 

I tried to run calculations to see how much it would cost me to extend and change it to peppercorn and was getting crazy numbers like 90k. Because the lease is so long the present value of the compensation if cash flows to freeholder is still huge. But then, I’m not sure if I was calculating correctly. 

If you really like the flat try find a specialist legal advisor who can estimate more precisely how much it could cost to remove this doubling clause