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

StableBond967

anselld said:

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

Thank you for your explination, this is even more worrying that I had imagined then!

anselld

StableBond967 said:

anselld said:

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

Thank you for your explination, this is even more worrying that I had imagined then!

It is, but I would agree with those above it is not necessarily a showstopper ( unless your mortgage co object).
It is at least starting from a low base where even at the next review the ground rent will be less than many others on the market and fixed for another 21 years after that.

StableBond967

It is, but I would agree with those above it is not necessarily a showstopper ( unless your mortgage co object).
It is at least starting from a low base where even at the next review the ground rent will be less than many others on the market and fixed for another 21 years after that.

Right, with the ground rent starting off fairly low there is some breathing room at least. I m still concerned having this clause in the lease will make it difficult to sell even if the ground rent charge isn't very high at the time of sale.

I would definitely need to sell the property before the 23rd year (second rent review) otherwise it would go over the £250 AST mark and the payable ground rent would most likely be more than 0.1% of the properties value. Surely both the buyer and lender will notice that in the next rent review it will bring risk of AST and ask I change this.

When it comes to changing the clause, the only plausible way I see is through a statutory lease extension. I have concerns with the premium that I would have to pay to the landlord because of the loss of ground rent over the 85 year term.

user1977

The £250 limit point is about to become a non-issue when the Renters' Rights Bill is passed.

eddddy

Those ground rent terms shouldn't be a problem for most mortgage lenders under their current lending criteria.

(Although some very cautious lenders might want Housing Act indemnity insurance, to cover the later years of the mortgage.)


If you were to do a statutory lease extension today, it would probably cost about £4k (taking into account the escalating ground rent)  - plus professional fees of maybe £3k to £4k.

So one approach could be to offer £8k less than you would if the flat had a peppercorn ground rent.

And you could ask the seller to start the lease extension process if you want, so you don't have to wait 2 years.


The Leasehold and Freehold Reform Act 2024 is supposed to be implemented within the next year or two

It's intended to reduce the amount of professional fees - so that might save you a thousand or two. (And also remove the 2 year ownership rule.)

But ironically, the Act might result in the cost of the lease extension itself increasing. 
 

StableBond967

@user1977 I wasn't aware of this I will have to do some reading.

StableBond967

@eddddy Thanks for the info.

My lender didn't have any issues with the ground rent terms but required I get indemnity insurance.

I'm open to the idea of asking the seller whether they would agree to reduce the property price according to my expected costs to extend the lease and set the ground rent to a peppercorn. I just hope what you say is true and they escaling ground rent isn't taken into account.

I will also do some further reading regarding The Leasehold and Freehold Reform Act 2024. I have heard there might be some push back from landlords and it's not set in stone yet. Hopefully everything passes and makes it easier for leaseholders.

StableBond967

I just hope what you say is true and they escaling ground rent isn't taken into account.

that escalating ground rent *

eddddy

StableBond967 said:

 I just hope what you say is true and they escaling ground rent isn't taken into account.

Just to clarify - escalating ground rent does impact the cost of a lease extension.

I've edited my post to clarify that the compensation you'd have to pay the freeholder for loss of the escalating ground rent would be about £4k.

The other element of the lease extension cost (the reduction in value suffered by the freeholder) depends on the current value of the flat.

saajan_12

IMO there's no cause for concern here. RPI linked rent increases is actually better than a fixed % (eg double every x years) because by construction, it loosely follows inflation. So the buying power of the new ground rent after 21 years time is the same as the buying power of the prior ground rent. Yes there's a chance that RPI or CPI or any measure doesn't precisely match inflation of housing related items, but there's less chance that a random % matches it. While you can plan the next few months or even a year of expenses if the ground rent is a known number, 21 years is a long time when you or your buyer would have no idea if they'd have the same job, same expenses, etc. 

Re a future buyer, this is very much a standard type of ground rent arrangement so any buyer would have to accept that or never buy a flat. The £250 AST issue is very likely to be addressed anyway in the rent reform bill, evidencing that this is a common setup.