21 Year Rent Review Linked to RPI a Cause for Concern?

StableBond967

Hi, FTB here and am purchasing a flat in the UK for £215,000, outside of London.

I have recently been made aware of the ground rent conditions for the flat and I could really use some help coming to a decision on whether to back out over this or not.

The starting ground rent charge is £88.24 and there is a rent review clause tied to RPI. The rent review clause will exist for 85 years from 2025 to 2110 until becoming peppercorn and reviewed every 21 years, with the next review date in two years’ time (December 2027). 

I was told the RPI for the rent review is calculated comparatively from the RPI the month prior to the rent period to the month before the review date. From what I've estimated based off the RPI values over the previous 42 years, I can expect a 50% increase in ground rent over 21 years. This means with first review in two years’ time, the ground rent should rise from £88 to £135. It will then increase by 50% every 21 years, four times over, so £135 then £204, £310 and finally £471 per annum to close the 85-year term.

I am put off by the fact the amount it can rise by is an unknown, making it difficult to plan for. I've heard that RPI isn't necessarily an accurate representation for inflation when compared to CPI. I have been told the seller is not willing to do a Deed of Variation to remove the ground rent clause from the lease before completing though which is making me question whether I should withdraw from the purchase. 

The other option is to do a statutory lease extension after purchasing. The flat has 125 years remaining on the lease so it shouldn't be expensive to extend it when I can in two years time. However, I fear the landlord will expect a hefty premium to compensate for the loss in ground rent if I were to extend and this has me worried.

In your opinion do these ground rent conditions seem onerous and worth backing out over?

Will I find most flats in the UK have the same issue with ground rent and rent reviews?

If I were to through with the purchase and do a statutory lease extension later to make it a peppercorn, am I correct that it could be more costly for me because of the potential increase in premium due to the freeholders loss in potential ground rent?

Thanks for reading this far. I appreciate any responses and hope you all have a nice day.

anselld

Think you need to check your maths.  RPI in the 21 years to Dec 2024 has risen by a factor 2.14 ( aka a 114% increase).  If the revew took place now it would rise from £88 to £188.

Mortgage lenders also currently have a problem with ground rents in excess of £250 which it is inevitably going to get to at the second review.

Albermarle

Remember that as it is linked to inflation, its true value will not change, as everything will have gone up, including your income ( hopefully)
Pulling out of a £215K flat due to ground rent of £188 ( in 2 years time) that will not then change for 21 years, seems a big overreaction.

 I've heard that RPI isn't necessarily an accurate representation for inflation when compared to CPI.

Neither can be an accurate measure of your inflation, as it depends on your spending patterns.

Personally I would be a lot less worried about the ground rent, than a lot of other things that might in the next 21 years that could affect your finances
Trump 
War with Russia/China
Climate change
Getting married
having kids
+ a lot of unknowns.

StableBond967

Hi @anselld, thanks for your reply. It could be that I have calculated it improperly but I will share my working notes so that can be confirmed. 

I am using the Royal london Retail prices index (RPI) Table (doesn't let me post a link) as my source for the RPI values. Since the review clause says the month prior to the review date of December, I will be using November instead. 

So in Nov 2024 the RPI was 390.9 and in Nov 2003 it was 182.7. To get the percentage increase I subtract 182.7 from 390.9 and then divide that value by 390.9.

390.9 = 0.5326170376055257390.9 - 182.7 = 208.2<br>208.2 / 

So based off my calculations the previous 21 years resulted in an increease of 53.26%.

I then did the same for the 21 years prior from the previous review date which was December 2006. So in Novemeber 2006 the RPI was 201.1 and in 1985 it was 95.92. Performing the same calculation results in a 52.3% increase which is why I decided to use 50% as my estimate.

If I've incorrectly performed these calculation could please share how you are doing it?

StableBond967

Apoligies the formatting for the code block didn't come out as I had expected it  

I don't see a way to edit my reply so please see below for how the calculation should appear:

390.9 - 182.7 = 208.2

208.2 / 390.9 = 0.5326170376055257

StableBond967

Hi @Albermarle, thanks for your comment.

Whilst I agree the property value and my income should to increase over time as well, I have some doubts that it will increase as fast as the RPI, which I have heard is poor measure and often overestimated.

There may well be better things to worry about, but to me it's a valid concern if it means I will face difficulty selling the property in the future.

user1977

I wouldn't be overly concerned about the choice between RPI and CPI - they use different "shopping baskets" but they're both roughly going to keep in line with the value of money, even if they don't necessarily follow your own income or the value of the property. They are both much less arbitrary than the clauses which simply double the rent every x years.

Does it really make much difference to you whether it's, say, £300 or £400?

born_again

Another maybe more important thing to consider.

Do you see yourself still living in this flat in 21 years?

StableBond967

user1977 said:

I wouldn't be overly concerned about the choice between RPI and CPI - they use different "shopping baskets" but they're both roughly going to keep in line with the value of money, even if they don't necessarily follow your own income or the value of the property. They are both much less arbitrary than the clauses which simply double the rent every x years.

Does it really make much difference to you whether it's, say, £300 or £400?

I suppose the difference between the two isn't of huge concern to me. I'm mostly concerned with the rent review clause as a whole, whether it will impact the future saleability of the flat and the unknowns in which it could increase by. I understand I can extend the lease to make the ground rent a peppercorn, but this requires a premium to be paid and I am unsure whether this rent review clause will increase the premium by an absured amount. The landlord could file a section 45 and argue they are losing out on ground rent that would be payable until the year 2110 whilst accounting for inflation.

StableBond967

born_again said:

Another maybe more important thing to consider.

Do you see yourself still living in this flat in 21 years?

Hey @born_again. I do not consider myself living in the flat in 21 years time. However, I need to be sure that when I do sell the property, that mortgage brokers are willing to lend on it. It could be that lenders decide that leases with rent review clauses are problematic and stop lending on them. It could be that in the next review the ground rent will go above the 0.1% mark of the property value and that affects the saleability. The solution of making it peppercorn via a statutory lease extension also brings some concern. Since the rent review clause lasts until the year 2110, the landlord may claim a higher premium because of the loss in future ground rent charges, making it more difficult to remove the rent review clause altogether.

anselld

StableBond967 said:

Apoligies the formatting for the code block didn't come out as I had expected it  

I don't see a way to edit my reply so please see below for how the calculation should appear:

390.9 - 182.7 = 208.2

208.2 / 390.9 = 0.5326170376055257

That is incorrect.

With your figures the second line should be 208.2/182.7 = 1.14, ie a 114% increase over the base value as I said.

The other way to calculate is £88 * 390.9 / 182.7 =  £188