Leasehold with Ground Rent over £250p/a - General Question - No specific problem right now.

RHemmings

First: Please note that I don't have a property with a ground rent over £250p/a. Nor am I serious about buying one right now. This question is just to fill in gaps in my knowledge. 

What are the practical consequences of owning a property with a ground rent of over £250p/a, and that becoming an AST?

I've seen discussion of the possibility of the leaseholder being evicted. But, I've read that with the modern legal situation (different from some decades ago), this is unlikely to happen. The rent would have to remain unpaid for three years, and courts may well favour the leaseholder. I've seen it said by professionals that they are not aware of any cases of AST leaseholders being evicted in this way. (That is of course a claim that could be disproven by evidence). 

I'm guessing that it would be very hard to mortgage a property with such a ground rent. Not a problem if purchasing one with cash, but harder to sell it on. I've been thinking about this because I've seen a couple of properties being sold off that have doubling ground rents, and mortgage lenders don't like those. Even if the ground rent doubles every 20-25 years. 

The reason I ask this now is that I've seen a couple of properties for sale by auction where the ground rent is doubling, and it's going to go from < £250 p/a to > £250 p/a in the next few years. I was wondering if these were being offloaded potentially partially due to that. And if so, which is not guaranteed, what the owners are trying to avoid. 

Is there anything I've missed. 

As above, please note that I don't have a problem at the moment because I don't own such a property. Nor do I have one I'm thinking of buying in the short term. I only ask this because I want to know about such properties for 'general knowledge' and so that I can think generally about any such purchase in the future. 

I'm aware that there may be changes to the laws concerning leaseholds that may, at some point in the future, make this question irrelevant. 

eddddy

RHemmings said:

I've seen discussion of the possibility of the leaseholder being evicted. 

To be more accurate, the risk is of the lease being forfeited (or cancelled).

For example, you've paid £500k for a flat with 250 years left on the lease.

If the lease is forfeited, your 250 year lease no longer exists - and so you've lost £500k worth of property. (With no compensation.)

You'd then be living in a flat with no lease (and probably no right to be there), so the freeholder/landlord might start the process to evict you.

RHemmings said:

The rent would have to remain unpaid for three years, and courts may well favour the leaseholder.

I think you're muddling 2 bits of legislation.

If the ground rent is £250 or under (or £1000 or under in London), the freeholder/landlord can apply for forfeiture if either...

• The ground rent has been outstanding for 3 years, or
• The amount owed is greater than £350

The leaseholder can defend the action, and simply pay the money owed - and the forfeiture process stops. 


BUT  if the ground rent is over £250 (or £1000 in London), the lease is treated as a AST. 

With an AST, if rent (or ground rent) is 3 months overdue, the freeholder/landlord has a mandatory right to forfeit the lease. The court cannot stop them.

RHemmings said:

I've seen it said by professionals that they are not aware of any cases of AST leaseholders being evicted in this way. (That is of course a claim that could be disproven by evidence). 

As far as I'm aware, it's an issue that was identified by 'lawyers' reading the Housing Act 1988.

They spotted this unintended  potential 'loophole'.  I don't think it's been tested in court.

There's no evidence to suggest that parliament intended that a leaseholder should lose a £500k leasehold flat, because they were 3 months late paying their ground rent.

It looks like parliament is intending to close that 'loophole' in the Renters Reform Bill which is going through parliament at the moment.

In the meantime, mortgage lenders (but not leaseholders) can be protected by indemnity insurance.

RHemmings

Yes, @eddddy, you are correct. I've got this mixed up and back to the drawing board for me. 

RHemmings

Just a quick one: after not finding an estimator for the cost of a statutory leasehold extension which handles doubling ground rents, I wrote one. 

Previously I thought that a ground rent over the magic figures of £250 outside London and £1000 inside London could be magicked away with a statutory leasehold extension. However, when the ground rent is doubling - even very occasionally such as every 25 years - it appears that this makes the extension very expensive. 

A local property I was sort of interested in (but circumstances have changed this) has a current ground rent of £287. And, 241 years remaining on the lease with the next doubling in 2030. I have no other figures, but as an experiment I looked at the cost of a doubling ground rent with the next doubling in 2030, and then doubling every 25 years, and a discount rate of 5%. I've not finely checked my program's calculations follow the official rules, but based on a flat offered for £60,000 that I think might be worth £90,000 with better ground rent gave me an estimate of £30,334 just for the future ground rent, excluding all other costs. So, basically 'fixing' the doubling ground rent just by itself wipes out any discount from market value - assuming my market value estimate is correct. 

If the doubling interval is less (I tried 10 years too) and/or the discount rate is less (I tried 3.5% too after seeing that mentioned in another thread), then the cost for a statutory leasehold extension is even more. 

After having run the numbers, I guess the doubling ground rent clause is to make sure that the money received by the freeholder for a statutory lease extension is high, more than anything else. Without the doubling clause, online calculators give me about £5000 to extend, and wipe out the > £250 (outside London) ground rent. Which, if it was that cheap, I guess the owners would have done that before selling. 

eddddy

RHemmings said:

Previously I thought that a ground rent over the magic figures of £250 outside London and £1000 inside London could be magicked away with a statutory leasehold extension. However, when the ground rent is doubling - even very occasionally such as every 25 years - it appears that this makes the extension very expensive. 

<snip>

Yes - doubling ground rents, and ground rents that increase with RPI make a huge difference to the cost of lease extensions, and buying the freehold.

Details of the 'scandal' first emerged with reports that a leaseholder bought a Taylor Wimpey house for £122k, with ground rent doubling every 10 years (but only for the first 50 years) - and so the cost of later buying the freehold was £40k. 

See: https://www.pinneytalfourd.co.uk/the-hidden-costs-of-999-year-leaseholds/



The problem was that buyers said they were misled by some of the developers. (Some buyers said the developer's salespeople had told them they could later buy the freehold for "a couple of thousand".)

If the developers had been transparent and honest, maybe it would have been a useful scheme for some house buyers.

i.e. "If you can't afford a £162k freehold house today... you can buy the leasehold for £112k now, and buy the freehold for £40k later."

snowqueen555

I've been looking for a long time. The £250 a year is very common, worryingly even new leases on some fairly new builds from 2020ish seem to start out on £250pm.

Having spoken to some brokers, there doesn't seem to be much issue with lending form the banks, I guess it is so common now.

The flat I'm buying now has no ground rent due to new legislations, however they do have estate charges which are probably just as bad. It's all con really.