Lease Extension Question

Speedbird676

JM68 said:

The doubling of ground rent in that way (and particularly from a relatively high starting rate) is pretty much a scam by modern new builds to get excess profits, not (just) to hedge against inflation.

I predict when you get a professional valuer in and s/he does the calculation you will find, as edddy suggests, the premium you will have to pay will be significantly higher than calculators suggest when using the current £300 figure.

Other things to bear in mind.

- You can't start the process until you have lived there for 2 years, unless the current owner starts the process and assigns it to you.

- In terms of costs we paid around £1,000 for valuation report, £1,500 for legal costs, £1,000 for professional to handle negotiation, plus around £2,500 total for freeholder valuation and legal costs.  Plus IIRC VAT on top of all that.

- The freeholder came back with a stupidly high counter offer and also stretched out the time to end of every deadline, and did not settle until after we had to issue a tribunal claim (but before hearing), which we were advised is very common.

Lastly, FWIW, when we were looking to buy we did not find any vendors interested in reflecting our future lease extension costs into what they were willing to accept (except where it was much closer to 80 years left), so good luck!!!

Thanks - yes, appreciate it's a money making exercise for the freeholder.

We're aware of the many pitfalls of buying leasehold, which is why I wanted to focus just on the cost of the lease extension in this thread, but thank you for your input.

We're not intending to ask the vendor to cover the cost of any future lease extension we may or may not pursue. We had factored that into the original offer so just wanted to see how different the cost is likely to be to what we'd budgeted based on a fixed ground rent so we can decide for ourselves whether it's still a worthwhile investment for us.

Speedbird676

eddddy said:

Speedbird676 said:

That makes sense.

I think what I was struggling with, when I read the equation, was where G is variable what value do you plug in. If there was no escalation it would be £300 but as it isn't a fixed value what number is the input for G? It didn't seem fair to me that you would use, for example £19,200, because you'd be "buying out" the freeholder's income stream today at the future value which wouldn't be realised for another hundred years. At one point I put the average of all the ground rents over the remaining £110k into one of the calculators and out popped £60-80k for the extension 

The way you have explained it makes much more sense - to achieve that income stream based on a return of 6-7% what lump sum investment would be required today.

To put things in perspective...

• If an investor wanted a return of 7% - and you promised them one ground rent payment of £19,200 in 110 years time...

• They would only pay £11 for it today

One last question - as we'd need to wait two years until starting the lease extension, assuming we use the statutory process, is there any value in doing that prior to the ground rent increasing to £600?

If we did it once the ground rent had already increased to £600, would that materially impact the cost of the premium?

eddddy

Speedbird676 said:

One last question - as we'd need to wait two years until starting the lease extension, assuming we use the statutory process, is there any value in doing that prior to the ground rent increasing to £600?

If we did it once the ground rent had already increased to £600, would that materially impact the cost of the premium?

Just considering the ground rent - waiting 2 years might increase the lease extension cost by £1k to £2k.

(But doing it before or after the increase to £600 isn't really relevant.)


I'll use a simplified example to explain the £1k / £2k increase over 2 years.

• Let's say the ground rent element of your lease extension cost is currently £12k

• As explained above, if you pay that £12k now - you'll essentially be getting a 6% (or 7%) return on your £12k for those 2 years

• So in 2 years time your £12k will be worth £12k + 6% + 6% = £13.48k

• Similarly, the cost of the ground rent element of your lease extension will have increased from £12k to £13.48k during those 2 years

i.e. You'll have to pay £13.48k in 2 years time (which is £1.48k more than you would have to pay today).


But if you have the £12k today, and you can find an investment that pays 6%pa - in 2 years time your £12k will have become £13.48k anyway. So the net cost of the lease extension would be the same.

(But I doubt that you can really find a guaranteed investment that pays 6%!)