Lease extension cost with rising ground rent

tfridays16

Would appreciate any help. I've recently put in an offer on a flat which my solicitor has now discovered has a doubling ground rent clause every 25 years. My solicitor has requested a deed of variation - if this isn't agreed to by the seller, I think I'll just have to pull out but I have considered doing a lease extension - I'm just not sure on the cost, primarily the potential premium cost. I can find plenty of online calculators to work it out but nothing for rising ground rents - I have found a calculation to work it out but my maths isn't brilliant and it was giving me headache to even look at, haha.

This is the info I have -

Flat value: £330k

Lease: Started at 125 years (118 years left), ground rent currently £200 and doubles every 25 years (next due to rise to to £400 in 2041, and so on)

in London

I'd get a proper lease extension survey done if I did want to go down this route, but I'd like to get a vague idea of cost now - I'm imagining it to be way too expensive, but if it is not too bad and I could get the price knocked off the flat - it might be an option, I guess.

I'm a FTB and cash buyer, so the ground rent isn't an issue mortgage wise but obviously will impact potential to sell in the future.

On-the-coast

i don’t have any direct experience of ground rents, but doubling every 25 years doesn’t sound like a problem to me.  Inflation at 2.7% compounded for 25 years pretty much works out as doubling - so is this really a problem?
id be more worried about making sure I was comfortable with the term (duration) of the lease. 

eddddy

tfridays16 said:

This is the info I have -

Flat value: £330k

Lease: Started at 125 years (118 years left), ground rent currently £200 and doubles every 25 years (next due to rise to to £400 in 2041, and so on)

in London

I'd get a proper lease extension survey done if I did want to go down this route, but I'd like to get a vague idea of cost now - I'm imagining it to be way too expensive, but if it is not too bad and I could get the price knocked off the flat - it might be an option, I guess.

Based on those numbers, the cost of a statutory lease extension today should be somewhere between £6k and £8.5k.  

Plus legal and valuation costs - which might be another £3k to £4k.

You would either...

• Agree with the seller that they will start the lease extension process before completion (assuming they've owned the flat for at least 2 years)

• Or, you'd have to own the flat for 2 years before you could start the process yourself

But if your mortgage lender won't accept the doubling ground rent - neither of those options would work.

But if they accept the doubling ground rent, and if the flat is outside London - with either of those options, your mortgage lender will probably want indemnity insurance, as the ground rent is due to increase to more than £250.

tfridays16 said:

My solicitor has requested a deed of variation...

As you suggest, the freeholder can refuse this request - or ask for any price they choose.

So for example, if the freeholder asks for more than about £9k or £10k - it might make more sense to go down the 'Statutory Lease Extension' route.

LunaLater

Doubling every twenty-five years is pretty fair. As above, it’s less than a three percent increase per year,MSP not one of the cases where anyone will find their heirs owing more than the value of the home each year in rent.

Inflation is around 6% a year at the moment.

tfridays16

On-the-coast said:

i don’t have any direct experience of ground rents, but doubling every 25 years doesn’t sound like a problem to me.  Inflation at 2.7% compounded for 25 years pretty much works out as doubling - so is this really a problem?
id be more worried about making sure I was comfortable with the term (duration) of the lease. 

No, the ground rent itself doubling every 25 years isn't really the issue - the issue is, as my solicitor has correctly raised, many lenders are reluctant to offer mortgages with ground rent clauses like this so it might cause an issue in the future with selling.

tfridays16

eddddy said:

tfridays16 said:

This is the info I have -

Flat value: £330k

Lease: Started at 125 years (118 years left), ground rent currently £200 and doubles every 25 years (next due to rise to to £400 in 2041, and so on)

in London

I'd get a proper lease extension survey done if I did want to go down this route, but I'd like to get a vague idea of cost now - I'm imagining it to be way too expensive, but if it is not too bad and I could get the price knocked off the flat - it might be an option, I guess.

Based on those numbers, the cost of a statutory lease extension today should be somewhere between £6k and £8.5k.  

Plus legal and valuation costs - which might be another £3k to £4k.

You would either...

• Agree with the seller that they will start the lease extension process before completion (assuming they've owned the flat for at least 2 years)

• Or, you'd have to own the flat for 2 years before you could start the process yourself

But if your mortgage lender won't accept the doubling ground rent - neither of those options would work.

But if they accept the doubling ground rent, and if the flat is outside London - with either of those options, your mortgage lender will probably want indemnity insurance, as the ground rent is due to increase to more than £250.

tfridays16 said:

My solicitor has requested a deed of variation...

As you suggest, the freeholder can refuse this request - or ask for any price they choose.

So for example, if the freeholder asks for more than about £9k or £10k - it might make more sense to go down the 'Statutory Lease Extension' route.

Ok, that is actually less than the nightmare figure I was imagining! I think I'd definitely want the sellers to start the process before completion. I'm a cash buyer so mortgage not an issue for me, however will be for future buyers when I come to sell in future - which is the primary concern for me here. Thanks for your reply.

Richard1212

I agree with the sort of estimates for lease extension that have been quoted, especially by edddy. But why bother---118 years is a reasonable time period and I see no point in wasting money trying to extend it unless you want future generations of your family to live there !

As for the ground rent, it is wholly reasonable. I don't really see a problem----and yet you are talking about pulling out of the purchase ?????

tfridays16

Richard1212 said:

I agree with the sort of estimates for lease extension that have been quoted, especially by edddy. But why bother---118 years is a reasonable time period and I see no point in wasting money trying to extend it unless you want future generations of your family to live there !

As for the ground rent, it is wholly reasonable. I don't really see a problem----and yet you are talking about pulling out of the purchase ?????

I don't have any issue with the ground rent myself - my solicitor has raised the issue of the doubling rent clause potentially affecting me being able to sell in the future - this does worry me. Hence considering a lease extension to remove the ground rent, rather than it being about extending the lease. I'm just trying to look at all options at the moment. I've been looking into this for the past couple of days and seeking advice, the majority of which has been to steer clear to be honest, so am perhaps a little spooked at the moment.

Richard1212

It's only my opinion but your solicitor sounds as though he is spoiling everything for you. YOU are not bothered about the ground rent increases  and IMHO NOBODY else would be bothered either. Why not tell your solicitor the same sentiments, that you employ him  and tell him you don't want a deed of variation nor an extension of lease-----and take control of this matter yourself. I just cannot see any problem at all !!!!!!!

bouicca21

Whilst doubling every 25 years isn’t much of a problem in itself, it sounds as though there is no cap, so it will eventually go over the magic £1000. That may well be a mortgage-ability problem, so I think OP is right to be concerned.

eddddy

bouicca21 said:

Whilst doubling every 25 years isn’t much of a problem in itself, it sounds as though there is no cap, so it will eventually go over the magic £1000. That may well be a mortgage-ability problem, so I think OP is right to be concerned.

I guess you mean the AST threshold. I don't think the OP has mentioned where the flat is.

The threshold is £1000 in London, and £250 elsewhere.

• So if it's in London, the ground rent won't go over the £1000 threshold for about 80 years. So assuming 30 year mortgages, it will be 50 years before mortgage lenders are worried.

• But it will go over the £250 threshold in 18 years - so mortgage lenders will be worried about any mortgage today that is over 18 years long.

However...

• Just about all mortgage lenders will accept indemnity insurance for that (but there are still risks to the leaseholder)

• It looks like the Renters (Reform) Bill which is currently going through parliament will remove the £1000 / £250 ground rent 'loophole' - so it should stop being an issue

But there seems to be a general sentiment amongst buyers that high ground rents (and especially doubling ground rents) are bad - so maybe it's a good idea to remove it.