Potential Ground rent increase

wealthymiser

Threat of potential Ground rent increase

Hello everyone,

I am a first time home buyer with my mortgage accepted by Skipton. I am in advanced stages of Sales progression for a property (which is relatively new build, constructed  in 2017).

Skipton has reached out to our solicitors and mentioned that if our ground rent which is due to be revised in 2026 is going to be above £250 they would reject it.
Currently the Ground rent is £150. Our solicitors did try to reach out to their solicitors and ask if they can confirm based on the Retail price inflation (RPI) if it would reach to £250 by 2026.
Looks like the Vendor's solicitors have confirmed they can't really state if the current £150 ground rent would go up to £250 by 2026 based on RPI.

So our solicitors have mentioned that they are going to reach out to Skipton to see if they will accept an indemnity insurance and release the funds for the sale.

I have 2 questions now:

1) Would this hamper my purchase ?
2) Would this ground rent clause prove to be a headache for me in the future when I try to sell this property? If yes, what are they ways I can counter it for a smooth sale progression. The lease on this property is 1000 years and with 7 years over there is still 993 years left in it.

Thanks in advance for all your valuable inputs 

saajan_12

Comments in line. Main questions are
1) What stage are you at?
2) When was the ground rent based (ie month and year, read the lease)? From there you can calculate yourself, what the inflation has been so far. Provided there's no deflation in the next 2 years, the new ground rent will be at least that amount. 

Further comments in line below. 

wealthymiser said:

Threat of potential Ground rent increase

Hello everyone,

I am a first time home buyer with my mortgage accepted by Skipton. I am in advanced stages of Sales progression for a property (which is relatively new build, constructed  in 2017). - how far along are you exactly? Do you have a mortgage offer? Have you exchanged? 

Skipton has reached out to our solicitors and mentioned that if our ground rent which is due to be revised in 2026 is going to be above £250 they would reject it.
Currently the Ground rent is £150. Our solicitors did try to reach out to their solicitors and ask if they can confirm based on the Retail price inflation (RPI) if it would reach to £250 by 2026.- they couldn't possibly answer that any better than you or I can. It depends on the inflation in the next 2 years which is crystal ball territory. 
Looks like the Vendor's solicitors have confirmed they can't really state if the current £150 ground rent would go up to £250 by 2026 based on RPI. 

So our solicitors have mentioned that they are going to reach out to Skipton to see if they will accept an indemnity insurance - ok good, this would be to say that the lease won't be revoked for non payment in the way that an AST can be. That's currently a possibility if the ground rent is above £250. The indemnity wouldn't actually stop the ground rent going above £250. 
and release the funds for the sale. - are you planning on exchanging and completing quickly? Hopefully this isn't beign done against the clock to complete, and you can still choose to walk away. 

I have 2 questions now:

1) Would this hamper my purchase ? - depends on how difficult Skipton want to be. Increases in line with inflation are fairly reasonable and this is an issue that will affect pretty much all leaseholds sooner or later. 
2) Would this ground rent clause prove to be a headache for me in the future when I try to sell this property? If yes, what are they ways I can counter it for a smooth sale progression. The lease on this property is 1000 years and with 7 years over there is still 993 years left in it. - Well yes but about the same headache as you'd ahve for almost any other flat.. its typical for ground rent to increase based on some formula (and RPI is a reasonable one). In 1000 years its fairly likely that the formula will mean the ground rent increases past £250, resulting in this issue. So there will need to be some legislation about it. 

Thanks in advance for all your valuable inputs 

NameUnavailable

Firstly, you're not buying a property as it stands, you're buying a lease. The lease allows you to occupy the property.

Is it a flat or house?

If it's a house it would be a fairly straightforward process to purchase the freehold and do away with the ground rent altogether (and own the property).

If it's a flat you would need to extend the lease or seek to buy the freehold along with your fellow leaseholders if it's possible and if you can get 50% or more of the others to agree.

As it stands, yes it probably will be an issue if you buy now and didn't take action to remove the ground rent before you try to sell again.

wealthymiser

UPDATE: I understand from  my solicitor who finally got back to me saying , we are actually waiting on two parties for a response at the moment.

1 - The freeholder if they would accept a Deed of Variation 
&
2 - The Mortgage lender if they would accept the Indemnity insurance.

Considering the lead time involved Indemnity insurance seems to be a faster option.
So, what I am considering is if Skipton agrees the Indemnity insurance and goes ahead, then I can currently get the property and convert the property to Freehold like @NameUnavailable mentioned.

@NameUnavailable Apologies for not mentioning earlier, I am purchasing a house and not a flat under lease.

However, I am not sure of two things
1 - How long should I stay in the house before I can apply for Freehold ?
&
2 - How much would the Freeholder conversion cost ? Currently the property is valued at £230k and has 993 years of lease left in it with a Ground rent of £150.

@saajan_12 - Thanks a lot for your detailed information on this. It was really helpful.

To answer your questions ,
1 - The seller has already signed the contract and is ready for exchange , I am yet to sign mine, since my solicitors are still preparing it, waiting for a response from the lender or Freeholder as mentioned above.
2- I am not too sure of the answer for the second question, since I have been asking my solicitor for a summary of Lease document for me to view but they told they will give it all together for me to view before signing and if I needed to view it before that, it is out of standard service and would cost me extra.

I hope the decision I am taking is right and any of your advice would be very valuable on this , and again thanks a lot for taking your time to frame your responses  

eddddy

wealthymiser said:

However, I am not sure of two things
1 - How long should I stay in the house before I can apply for Freehold ?
&
2 - How much would the Freeholder conversion cost ? Currently the property is valued at £230k and has 993 years of lease left in it with a Ground rent of £150.

If you want to compulsorily purchase the freehold (it's called statutory enfranchisement)...

Under the current legislation...

• You have to own the leasehold house for 2 years...

• ... or (if the seller has owned the leasehold house for at least 2 years) the seller can start the process for buying the freehold before completion, and you can take over the process after completion

• The cost of the freehold is likely to be around £10k - but it's probably sensible to get a professional valuer to confirm this

• The legal and valuation fees will probably be around £3k to £4k

However, the Leasehold and Freehold Reform Act has just been passed by Parliament, and it's expected to be implemented in 2025 or 2026.

Under the new legislation...

• The 2 year ownership requirement will be scrapped - so you won't have to wait

• The cost of the freehold might decrease or increase or stay the same - it's not certain yet. (There are arguments about what discount rate should be used.)

• The legal and valuation fees should reduce by around 50%

Or... given the uncertainty, you might (or you might not) get a reasonable deal by approaching the current freeholder informally and trying to negotiate a price for buying the freehold.

But it's up to the freeholder whether they want to do this - they are free to ignore you, or ask for a silly price, etc.

saajan_12

wealthymiser said:

@saajan_12 - Thanks a lot for your detailed information on this. It was really helpful.

To answer your questions ,
1 - The seller has already signed the contract and is ready for exchange , I am yet to sign mine, since my solicitors are still preparing it, waiting for a response from the lender or Freeholder as mentioned above.
2- I am not too sure of the answer for the second question, since I have been asking my solicitor for a summary of Lease document for me to view but they told they will give it all together for me to view before signing and if I needed to view it before that, it is out of standard service and would cost me extra.

I hope the decision I am taking is right and any of your advice would be very valuable on this , and again thanks a lot for taking your time to frame your responses  

1 - Well the seller will usually be ready to sell (subject to their onward chain), its the buyer that would want to do the checks so would take longer. I only asked because you mentioned 'release funds' which made it sound more urgent. If you haven't exchanged and the lender haven't given their offer, then these are all valid questions to be asking. Just wait for the lender's response re indemnity. 

2 - Can you ask them for the lease as is? While I understand its more work for them to put together a summary while some information may still be incoming, there's also little sense in waiting for the last minute. A lease is long but similar to a normal tenancy agreement, the main rent amount and frequency should be fairly obvious even if you don't understand all more detailed  clauses. 

wealthymiser said:

@NameUnavailable Apologies for not mentioning earlier, I am purchasing a house and not a flat under lease.

Ah, that may change things.. I'm less familiar with leashold houses but it is less standard and therefore the general view is its more likely to be a problem upon resale (whereas with a flat its the norm)

Bfowler91

Skiptons requirements from the lending handbook are below:

‘ GROUND RENT & EVENT FEES
Ground rent and other event fees must remain at a reasonable level at all times during the lease term with a minimum period of 10 years between any increases. The ground rent and other event fees must not exceed more than 0.1% of the property value at the start of the lease term.

It is acceptable if the ground rent escalation is linked to the Retail Price Index (RPI) or a similar index. Compounded RPI increases are not acceptable.

Clauses providing for Ground Rent increases that 'double' (or more) the preceding level are not acceptable.

A ground rent clause which allows the ground rent charge to exceed £250 p.a. outside of London or exceed £1,000 p.a. in London is not acceptable.

If the terms of the lease do not meet our requirements as set out above, we require that you revert to the Landlord to have the lease terms varied in the first instance. If this isn’t possible, we may be agreeable to you obtaining suitable indemnity insurance but we will require that you notify us prior to any indemnity insurance being effected. 

You must confirm that any indemnity insurance proposed will adequately protect us and you still must be able to certify that the title is good and marketable. We will require a copy of the policy schedule to be submitted to us with the Certificate of Title. You must also confirm that you have drawn the borrower’s attention specifically to any conditions relating to leasehold properties in the mortgage offer.’

Just wondering if they accepted the indemnity?