Doubling ground rent clause on shared ownership purchase London-advice please :)

Love_nut_butter

Hi all, thanks for accepting me onto the forum 

I am in the later stages of purchasing a leasehold property in London (shared ownership, purchasing 25%). My solicitor has highlighted a doubling ground rent clause (rent to double every 25 years) which I was unaware of when making my offer, and only became apparent when they questioned conflicting information in the lease. The ground rent will double in 10 years, and will be £3200 for the last £25 years. Financially, this will be untenable for me, and I understand will be difficult to sell in the future.

My solicitor has asked the sellers' solicitors to clarify why ground rent is being charged on the basis that this is a shared ownership, and that ground rent would normally be payable upon staircasing to 100%. No reply received as of yet.

My solicitor has also asked the freeholder (landlord) and vendor for a deed of variation to cap ground rent at £1000 per annum and to increase with RPI. The freeholder (landlord) has agreed, and the vendor would like me to pay for all fees. I do not yet know how much this will cost, and have asked for the cost, although I estimate it will be in the thousands for which I just don't have the funds. My solicitor also suggested to the vendor that, as an alternative, they start the process of a lease extension and then assign the right to me, reducing the ground rent to a peppercorn. I would need to have owned the property for 2 years before applying for a lease extension. The vendor has declined this option due to the cost.

The seller is threatening to pull out due to the duration of this transaction, and will most likely pull out if a deed of variation process is started due to this adding a delay. I understand their frustration, but I'm surprised as to why they did not address the ground rent clause before going on the market. My solicitor is still awaiting replies from their solicitor and the landlord's solicitor (including the first query above) which is causing the delays.

I will ask how much the deed of variation will cost. However, have any vendors here experienced similar ground rent clause issues when purchasing? How did you resolve these? Are there any options I am missing, besides just going ahead with the purchase and extending the lease in 2 years (and saving furiously before then lols )?

km1500

My gut feel is that doubling every 25 years would lead to a lower figure than rising with RPI over 25 years

my quick calculation comes to the figure that doubling every 25 years is about 3% a year but happy to be proved wrong

eddddy

Are you buying a flat - as opposed to a house?

Is the landlord a Housing Association - as opposed to to some type of private organisation?

Love_nut_butter said:

My solicitor also suggested to the vendor that, as an alternative, they start the process of a lease extension and then assign the right to me, reducing the ground rent to a peppercorn. I would need to have owned the property for 2 years before applying for a lease extension. The vendor has declined this option due to the cost.

That sounds like you are describing a 'Statutory Lease Extension'.

But under the current law, shared ownership properties aren't eligible for 'Statutory Lease Extensions' - unless you own 100%. (But there are plans to change the law to allow this.)

But maybe the landlord has a discretionary or voluntary scheme, where they allow leaseholders to extend leases on the same terms as a Statutory Lease Extension. But if it's voluntary, they could withdraw the scheme.

Love_nut_butter said:

 My solicitor has highlighted a doubling ground rent clause (rent to double every 25 years) which I was unaware of when making my offer, and only became apparent when they questioned conflicting information in the lease. The ground rent will double in 10 years, and will be £3200 for the last £25 years. Financially, this will be untenable for me, and I understand will be difficult to sell in the future.

Can you clarify - what is the current ground rent, and how many years are left on the lease?

Ground rent that doubles every 25 years isn't usually a problem for mortgage lenders.


And I'm guessing that the ground rent will reach £3200 in something like 60 to 100 years time. 

Assuming inflation is the same for the next 60 years as the last 60 years - a ground rent of £3200 a year in 60 years time will be equivalent to a ground rent of about £185 per year today.  (Which is probably cheaper than the current ground rent.)

saajan_12

Love_nut_butter said:

Hi all, thanks for accepting me onto the forum 

I am in the later stages of purchasing a leasehold property in London (shared ownership, purchasing 25%). My solicitor has highlighted a doubling ground rent clause (rent to double every 25 years) which I was unaware of when making my offer, and only became apparent when they questioned conflicting information in the lease. The ground rent will double in 10 years, and will be £3200 for the last £25 years. Financially, this will be untenable for me, and I understand will be difficult to sell in the future.

Doubling in 25 years is fairly common, and equates to an annual increase of ~3% with compounding which isn't too far off average inflation. I wouldn't say it makes it particularly difficult to sell. 

How long is the lease - if that last 25 years is several decades in the future, then with inflation £3200 won't be worth as much as it is today, so may not necessarily be untenable. There might be an issue with the 

Love_nut_butter said:

My solicitor has asked the sellers' solicitors to clarify why ground rent is being charged on the basis that this is a shared ownership, and that ground rent would normally be payable upon staircasing to 100%. No reply received as of yet.

My solicitor has also asked the freeholder (landlord) ...

What's the property type eg flat or house? Usually a flat would have a freeholder that owns the land and building outside your flat, for which you pay ground rent. That's the case even with a 100% owned lease. Separately you also only own 25% of the flat lease, so you'd pay rent on the rest. 

Love_nut_butter said:

My solicitor has also asked the freeholder (landlord) and vendor for a deed of variation to cap ground rent at £1000 per annum and to increase with RPI. The freeholder (landlord) has agreed, and the vendor would like me to pay for all fees. I do not yet know how much this will cost, and have asked for the cost, although I estimate it will be in the thousands for which I just don't have the funds. My solicitor also suggested to the vendor that, as an alternative, they start the process of a lease extension and then assign the right to me, reducing the ground rent to a peppercorn. I would need to have owned the property for 2 years before applying for a lease extension. The vendor has declined this option due to the cost.

The seller is threatening to pull out due to the duration of this transaction, and will most likely pull out if a deed of variation process is started due to this adding a delay. I understand their frustration, but I'm surprised as to why they did not address the ground rent clause before going on the market. My solicitor is still awaiting replies from their solicitor and the landlord's solicitor (including the first query above) which is causing the delays.

I will ask how much the deed of variation will cost. However, have any vendors here experienced similar ground rent clause issues when purchasing? How did you resolve these? Are there any options I am missing, besides just going ahead with the purchase and extending the lease in 2 years (and saving furiously before then lols )?

Deed variation is an option, but its usually just to get the lender happy. As far as the freeholder is concerned, they currently have the right to receive the doubling rent, so if they were to give that up or cap at £1000, they would want the difference in a lump sum now. So its not going to make the overall cost any lower, it just means that your lender isn't worried about a future high payment which may threaten their collateral. 

Not resolved earlier because arguably there's nothing to resolve.. the rent escalation isn't that high in principle. 

Love_nut_butter

My worry and that of my solicitor is that I won't be able to sell in the future (mortgage lenders averse to doubling ground rents). 

Yes, it's a flat, owned by housing association.  Informal lease extension available so I will look into that.

Thank you all for your comments, all really appreciated and helpful.

km1500

mortgage lenders aren't averse to doubling ground rents as such, they are averse to doubling ground rents in short periods - say every ten years

awfulmemory

Hi, poor you. And to have got this far. Re s o, generally speaking, you cannot extend or vary unless you own 100%. Not sure from your post if you are buying the whole lease, or 25%.  Gut feeling is, that the seller will have the same issue with whomever next tries to buy so they would be best to help as much as possible to get this over the line. Personally, i would run a mile, because that is insane. Orbit and the mega greedy housing association did like a hefty 10 year doubling. Listen to your  solicitor, altho this should have spotted first off. Always worth buying a lease before you put in an offer.

poseidon1

awfulmemory said:

Hi, poor you. And to have got this far. Re s o, generally speaking, you cannot extend or vary unless you own 100%. Not sure from your post if you are buying the whole lease, or 25%.  Gut feeling is, that the seller will have the same issue with whomever next tries to buy so they would be best to help as much as possible to get this over the line. Personally, i would run a mile, because that is insane. Orbit and the mega greedy housing association did like a hefty 10 year doubling. Listen to your  solicitor, altho this should have spotted first off. Always worth buying a lease before you put in an offer.

I am with awfulmemory, run a mile.

From my perspective, SO flats are red flag by their very nature, made worse since the Grenfell cladding scandal and the high costs many freeholders are passing on to leaseholders. This property is even worse , escalating grounds rents are to be avoided on principle and this one seems especially egregious.

Walk away, and use this unfortunate experience as an object lesson to make better due diligence enquires before making  a purchase offer.

Katiejane13uk

There is so much wrong with Shared Ownership please make sure you do your homework.

https://www.sharedownershipresources.org/