HSBC Mortgage on a leasehold flat with high ground rent

JSM45

Hi all,

I am currently in the process of selling my flat. We have, as expected, hit an issue with the ground rent.

The buyers solicitor is saying that HSBC will not lend due to the ground rent (I agree with this).
They are also saying that HSBC will not accept a suitable indemnity policy (I don't agree with this).
The purchaser is happy to proceed if an indemnity policy will satisfy HSBC, and is fully aware of the ground rent.

My solicitor also believes that a suitable indemnity should suffice.

I have tried to contact HSBC on this, but they refuse to answer as I am not a solicitor (!?!?)

The value of the property is £132,500


The ground rent is fixed and is as follows:


Date Lease granted:        

• 01st January 2005

Term of lease:                  

• 125 years

Ground Rent:             

• £150 per annum for the first ten years of the term
• £300 per annum for the second ten years of the term
• £450 per annum for the third ten years of the term
• £600 per annum for the fourth ten years of the term
• £750 per annum for the fifth ten years of the term
• £900 per annum for the first ten years of the term
• £1050 per annum for the first remainder of the term

HSBC's written criteria is as follows:

• Leasehold properties must NOT be subject to an onerous lease clause regarding an excessive or unreasonably escalating ground rent (Purchases only)

  
  Lease terms such as ground rents must be reasonable at all times during the term of the lease and adhere to our requirements below:

• This criteria applies to i) properties subject to a lease granted before the Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022; or ii) Leases which were contractually agreed (i.e. contracts exchanged) prior to the Leasehold Reform (Ground Rent) Act 2022 but not granted until after 30 June 2022
• Maximum Ground Rent p.a. must not exceed £250 (£1,000 in Greater London). If there is the potential (within the lease provisions) for the annual ground rent to exceed the applicable level, it should be reduced to within the required threshold. This would require a lease variation on the lines that under no circumstances could reviewed rent be increased so that it comes within the applicable Assured Shorthold Tenancy (AST) threshold in the Housing Act 1988 (as amended) or in any legislation amending or replacing it or in any subordinate legislation issued under it. If the lease cannot be varied, a suitable indemnity policy must be put in place to protect the risk to the Bank
• Ground Rent less than or equal to 0.2% of the current property value (New Builds restricted to 0.1%)
• Grounds Rent review period greater than or equal to 10 years
• Ground Rent escalation less than or equal to Retail Price Index (RPI). Any RPI increase must not exceed the AST thresholds
• Ground Rent doubles every 20 years or any longer period and does not continue to double after 125 years. Any doubling of ground rent must not be capable of exceeding the AST thresholds.

Can anyone advise where I can get a definitive answer?

CSI_Yorkshire

Are they saying that they won't accept any indemnity policy, or are they saying that the one proposed by your solicitor is not suitable?

JSM45

CSI_Yorkshire said:

Are they saying that they won't accept any indemnity policy, or are they saying that the one proposed by your solicitor is not suitable?

The purchasers solicitor is saying that they won't accept any indemnity policy at all.

It is their interpretation of the criteria. 

I believe that their solicitor has not contacted HSBC (my estate agent is speaking to the purchaser).

user1977

JSM45 said:

Can anyone advise where I can get a definitive answer?

The definitive answer is in the UK Lenders Handbook, which is what you've quoted above.

Your solicitor should be sorting this out with the buyer's solicitor.

No, HSBC are hardly likely to want to chat to their customers' vendors!

[Deleted User]

The problem with an indemnity policy is that there is a maximum value it will pay out, so if the flat ever goes over that amount the lender could lose out. It's a big hassle to go through the policy and make sure it's not got some terms that could screw them later too. Easier just to say no.

What you want is a lease extension that reduces the ground rent to a peppercorn amount. It will cost you thousands but resolves this issue completely and will add some years to the lease too.

JSM45

user1977 said:

JSM45 said:

Can anyone advise where I can get a definitive answer?

The definitive answer is in the UK Lenders Handbook, which is what you've quoted above.

Your solicitor should be sorting this out with the buyer's solicitor.

No, HSBC are hardly likely to want to chat to their customers' vendors!

No need to shout 

bouicca21

I'm not great at arithmetic but isn't the problem here the ground rent as a percentage of the value of the property?  It is already greater than 0.2%.

£132,500 x 0.2% = £265.  Ground rent went to £300 in 2015.

K_S

@jsm45

So it was £150 in 2005, £300 in 2015, will be £450 in 2025, £600 in 2035 and £750 in 2045.

If (say) this is a mortgage with a 30 year term, that takes it to 2053 so during the term of the mortgage the GR will go up to £750.

Given that the GR is guaranteed to exceed both £250 and 0.2% of the property value during the lifetime of the mortgage, perhaps the indemnity policy does not work in this scenario? I'm not a solicitor but that sounds like a possible interpretation.

Hopefully your solicitor turns out to be correct, good luck!

JSM45 said:

Hi all,

I am currently in the process of selling my flat. We have, as expected, hit an issue with the ground rent.

The buyers solicitor is saying that HSBC will not lend due to the ground rent (I agree with this).
They are also saying that HSBC will not accept a suitable indemnity policy (I don't agree with this).
The purchaser is happy to proceed if an indemnity policy will satisfy HSBC, and is fully aware of the ground rent.

My solicitor also believes that a suitable indemnity should suffice.

I have tried to contact HSBC on this, but they refuse to answer as I am not a solicitor (!?!?)

The value of the property is £132,500


The ground rent is fixed and is as follows:


Date Lease granted:        

• 01st January 2005

Term of lease:                  

• 125 years

Ground Rent:             

• £150 per annum for the first ten years of the term
• £300 per annum for the second ten years of the term
• £450 per annum for the third ten years of the term
• £600 per annum for the fourth ten years of the term
• £750 per annum for the fifth ten years of the term
• £900 per annum for the first ten years of the term
• £1050 per annum for the first remainder of the term

HSBC's written criteria is as follows:

• Leasehold properties must NOT be subject to an onerous lease clause regarding an excessive or unreasonably escalating ground rent (Purchases only)

  
  Lease terms such as ground rents must be reasonable at all times during the term of the lease and adhere to our requirements below:

• This criteria applies to i) properties subject to a lease granted before the Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022; or ii) Leases which were contractually agreed (i.e. contracts exchanged) prior to the Leasehold Reform (Ground Rent) Act 2022 but not granted until after 30 June 2022
• Maximum Ground Rent p.a. must not exceed £250 (£1,000 in Greater London). If there is the potential (within the lease provisions) for the annual ground rent to exceed the applicable level, it should be reduced to within the required threshold. This would require a lease variation on the lines that under no circumstances could reviewed rent be increased so that it comes within the applicable Assured Shorthold Tenancy (AST) threshold in the Housing Act 1988 (as amended) or in any legislation amending or replacing it or in any subordinate legislation issued under it. If the lease cannot be varied, a suitable indemnity policy must be put in place to protect the risk to the Bank
• Ground Rent less than or equal to 0.2% of the current property value (New Builds restricted to 0.1%)
• Grounds Rent review period greater than or equal to 10 years
• Ground Rent escalation less than or equal to Retail Price Index (RPI). Any RPI increase must not exceed the AST thresholds
• Ground Rent doubles every 20 years or any longer period and does not continue to double after 125 years. Any doubling of ground rent must not be capable of exceeding the AST thresholds.

Can anyone advise where I can get a definitive answer?

Bfowler91

K_S said:

@jsm45

So it was £150 in 2005, £300 in 2015, will be £450 in 2025, £600 in 2035 and £750 in 2045.

If (say) this is a mortgage with a 30 year term, that takes it to 2053 so during the term of the mortgage the GR will go up to £750.

Given that the GR is guaranteed to exceed both £250 and 0.2% of the property value during the lifetime of the mortgage, perhaps the indemnity policy does not work in this scenario? I'm not a solicitor but that sounds like a possible interpretation.

Hopefully your solicitor turns out to be correct, good luck!

JSM45 said:

Hi all,

I am currently in the process of selling my flat. We have, as expected, hit an issue with the ground rent.

The buyers solicitor is saying that HSBC will not lend due to the ground rent (I agree with this).
They are also saying that HSBC will not accept a suitable indemnity policy (I don't agree with this).
The purchaser is happy to proceed if an indemnity policy will satisfy HSBC, and is fully aware of the ground rent.

My solicitor also believes that a suitable indemnity should suffice.

I have tried to contact HSBC on this, but they refuse to answer as I am not a solicitor (!?!?)

The value of the property is £132,500


The ground rent is fixed and is as follows:


Date Lease granted:        

• 01st January 2005

Term of lease:                  

• 125 years

Ground Rent:             

• £150 per annum for the first ten years of the term
• £300 per annum for the second ten years of the term
• £450 per annum for the third ten years of the term
• £600 per annum for the fourth ten years of the term
• £750 per annum for the fifth ten years of the term
• £900 per annum for the first ten years of the term
• £1050 per annum for the first remainder of the term

HSBC's written criteria is as follows:

• Leasehold properties must NOT be subject to an onerous lease clause regarding an excessive or unreasonably escalating ground rent (Purchases only)

  
  Lease terms such as ground rents must be reasonable at all times during the term of the lease and adhere to our requirements below:

• This criteria applies to i) properties subject to a lease granted before the Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022; or ii) Leases which were contractually agreed (i.e. contracts exchanged) prior to the Leasehold Reform (Ground Rent) Act 2022 but not granted until after 30 June 2022
• Maximum Ground Rent p.a. must not exceed £250 (£1,000 in Greater London). If there is the potential (within the lease provisions) for the annual ground rent to exceed the applicable level, it should be reduced to within the required threshold. This would require a lease variation on the lines that under no circumstances could reviewed rent be increased so that it comes within the applicable Assured Shorthold Tenancy (AST) threshold in the Housing Act 1988 (as amended) or in any legislation amending or replacing it or in any subordinate legislation issued under it. If the lease cannot be varied, a suitable indemnity policy must be put in place to protect the risk to the Bank
• Ground Rent less than or equal to 0.2% of the current property value (New Builds restricted to 0.1%)
• Grounds Rent review period greater than or equal to 10 years
• Ground Rent escalation less than or equal to Retail Price Index (RPI). Any RPI increase must not exceed the AST thresholds
• Ground Rent doubles every 20 years or any longer period and does not continue to double after 125 years. Any doubling of ground rent must not be capable of exceeding the AST thresholds.

Can anyone advise where I can get a definitive answer?

Hi just wondering if you managed to resolve this in the end with the indemnity policy?