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

StableBond967

@eddddy Thanks for clarifying and £4k would be an acceptable compromise for me. Do you mind me asking how you estimated the £4k figure though?

I'm curious whether it would it be dependant on the current ground rent charge? If so all the more reason to ask for an assignment of benefit to get the ball rolling earlier, as I now expect the ground rent to rise to £188 in two years time.

Appreciate the help 🙏

eddddy

StableBond967 said:

I'm curious whether it would it be dependant on the current ground rent charge? If so all the more reason to ask for an assignment of benefit to get the ball rolling earlier, as I now expect the ground rent to rise to £188 in two years time.

For a statutory lease extension, the rationale behind the calculation of compensation for loss of Ground Rent is something like this:

How much would a rational investor pay today for the following income stream:

• £88 for the next 2 years
• £88 + RPI increase for the 21 years after that
• £88 + further RPI increase for the 21 years after that
• etc, etc

So if you did a lease extension today - a rational investor would take into account that the income steam is increasing in 2 years time (and 21 years after that, etc).

So doing the lease extension before or after the increase shouldn't make a significant difference.




In simple terms, the statutory lease extension process works like this (using made-up numbers) :

• The leaseholder (or probably their valuer) says to the freeholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £3k for that income stream - so I'm offering you £3k"

• The freeholder (or probably their valuer) says to the leaseholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £6k for that income stream - so I'm asking for £6k"

(And often the leaseholder and/or freeholder are bluffing/exaggerating, in the hope of getting a good deal etc.)

But it would cost the leaseholder and freeholder about £2k each to go to tribunal - and you can't recover those costs from the other party. So neither party wants to go to tribunal, because it's likely to be a waste of money.

So it can be a case of negotiating / arguing / bluffing until you agree on a price. 




In terms of how I reached my estimate... I initially based it on some past tribunal decisions, plus discussions I've had with a valuer about ground rents that increase with RPI. But that seemed to come out low.

So instead, I did a calculation on the assumption that the ground rent would roughly double at each 21 year review. 

StableBond967

eddddy said:

StableBond967 said:

I'm curious whether it would it be dependant on the current ground rent charge? If so all the more reason to ask for an assignment of benefit to get the ball rolling earlier, as I now expect the ground rent to rise to £188 in two years time.

For a statutory lease extension, the rationale behind the calculation of compensation for loss of Ground Rent is something like this:

How much would a rational investor pay today for the following income stream:

• £88 for the next 2 years
• £88 + RPI increase for the 21 years after that
• £88 + further RPI increase for the 21 years after that
• etc, etc

So if you did a lease extension today - a rational investor would take into account that the income steam is increasing in 2 years time (and 21 years after that, etc).

So doing the lease extension before or after the increase shouldn't make a significant difference.




In simple terms, the statutory lease extension process works like this (using made-up numbers) :

• The leaseholder (or probably their valuer) says to the freeholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £3k for that income stream - so I'm offering you £3k"

• The freeholder (or probably their valuer) says to the leaseholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £6k for that income stream - so I'm asking for £6k"

(And often the leaseholder and/or freeholder are bluffing/exaggerating, in the hope of getting a good deal etc.)

But it would cost the leaseholder and freeholder about £2k each to go to tribunal - and you can't recover those costs from the other party. So neither party wants to go to tribunal, because it's likely to be a waste of money.

So it can be a case of negotiating / arguing / bluffing until you agree on a price. 




In terms of how I reached my estimate... I initially based it on some past tribunal decisions, plus discussions I've had with a valuer about ground rents that increase with RPI. But that seemed to come out low.

So instead, I did a calculation on the assumption that the ground rent would roughly double at each 21 year review. 

Thanks for your guidance @eddddy.

Just so I'm 100% clear in my understanding here.

Assuming the RPI will increase the ground rent by 100% the annual payments over each rent review period are:

• £88 (until 2027)
• £176 (until 2048)
• £352 (until 2069)
• £704 (until 2090)
• £1,408 (until 2110)

This would total to £54,208 in payments made annually by the end of the 85-year term. If they will be considering that the income stream is increasing, I don't understand how come the estimated figure is so low?

Without even considering RPI increases, at £88 over 85 years it would total to about £7500. Because I am paying it off in one lump sum is it heavily discounted or something? Is it that the loss in ground rent charges is not considered as important as other factors like the length of the lease, or purchase price of the property when deciding the premium to pay the landlord?

Apologies if I'm not understanding right away. I just want to make sure I do before letting my solicitor how I will proceed

Albermarle

StableBond967 said:

eddddy said:

StableBond967 said:

I'm curious whether it would it be dependant on the current ground rent charge? If so all the more reason to ask for an assignment of benefit to get the ball rolling earlier, as I now expect the ground rent to rise to £188 in two years time.

For a statutory lease extension, the rationale behind the calculation of compensation for loss of Ground Rent is something like this:

How much would a rational investor pay today for the following income stream:

• £88 for the next 2 years
• £88 + RPI increase for the 21 years after that
• £88 + further RPI increase for the 21 years after that
• etc, etc

So if you did a lease extension today - a rational investor would take into account that the income steam is increasing in 2 years time (and 21 years after that, etc).

So doing the lease extension before or after the increase shouldn't make a significant difference.




In simple terms, the statutory lease extension process works like this (using made-up numbers) :

• The leaseholder (or probably their valuer) says to the freeholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £3k for that income stream - so I'm offering you £3k"

• The freeholder (or probably their valuer) says to the leaseholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £6k for that income stream - so I'm asking for £6k"

(And often the leaseholder and/or freeholder are bluffing/exaggerating, in the hope of getting a good deal etc.)

But it would cost the leaseholder and freeholder about £2k each to go to tribunal - and you can't recover those costs from the other party. So neither party wants to go to tribunal, because it's likely to be a waste of money.

So it can be a case of negotiating / arguing / bluffing until you agree on a price. 




In terms of how I reached my estimate... I initially based it on some past tribunal decisions, plus discussions I've had with a valuer about ground rents that increase with RPI. But that seemed to come out low.

So instead, I did a calculation on the assumption that the ground rent would roughly double at each 21 year review. 

Thanks for your guidance @eddddy.

Just so I'm 100% clear in my understanding here.

Assuming the RPI will increase the ground rent by 100% the annual payments over each rent review period are:

• £88 (until 2027)
• £176 (until 2048)
• £352 (until 2069)
• £704 (until 2090)
• £1,408 (until 2110)

This would total to £54,208 in payments made annually by the end of the 85-year term. If they will be considering that the income stream is increasing, I don't understand how come the estimated figure is so low?

Without even considering RPI increases, at £88 over 85 years it would total to about £7500. Because I am paying it off in one lump sum is it heavily discounted or something? Is it that the loss in ground rent charges is not considered as important as other factors like the length of the lease, or purchase price of the property when deciding the premium to pay the landlord?

Apologies if I'm not understanding right away. I just want to make sure I do before letting my solicitor how I will proceed

As the next increase is only in two years time, the total ground rent income over 85 years, taking inflation into account would be more like £11,000 than £7500 .

user1977

StableBond967 said:

eddddy said:

StableBond967 said:

I'm curious whether it would it be dependant on the current ground rent charge? If so all the more reason to ask for an assignment of benefit to get the ball rolling earlier, as I now expect the ground rent to rise to £188 in two years time.

For a statutory lease extension, the rationale behind the calculation of compensation for loss of Ground Rent is something like this:

How much would a rational investor pay today for the following income stream:

• £88 for the next 2 years
• £88 + RPI increase for the 21 years after that
• £88 + further RPI increase for the 21 years after that
• etc, etc

So if you did a lease extension today - a rational investor would take into account that the income steam is increasing in 2 years time (and 21 years after that, etc).

So doing the lease extension before or after the increase shouldn't make a significant difference.




In simple terms, the statutory lease extension process works like this (using made-up numbers) :

• The leaseholder (or probably their valuer) says to the freeholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £3k for that income stream - so I'm offering you £3k"

• The freeholder (or probably their valuer) says to the leaseholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £6k for that income stream - so I'm asking for £6k"

(And often the leaseholder and/or freeholder are bluffing/exaggerating, in the hope of getting a good deal etc.)

But it would cost the leaseholder and freeholder about £2k each to go to tribunal - and you can't recover those costs from the other party. So neither party wants to go to tribunal, because it's likely to be a waste of money.

So it can be a case of negotiating / arguing / bluffing until you agree on a price. 




In terms of how I reached my estimate... I initially based it on some past tribunal decisions, plus discussions I've had with a valuer about ground rents that increase with RPI. But that seemed to come out low.

So instead, I did a calculation on the assumption that the ground rent would roughly double at each 21 year review. 

Thanks for your guidance @eddddy.

Just so I'm 100% clear in my understanding here.

Assuming the RPI will increase the ground rent by 100% the annual payments over each rent review period are:

• £88 (until 2027)
• £176 (until 2048)
• £352 (until 2069)
• £704 (until 2090)
• £1,408 (until 2110)

This would total to £54,208 in payments made annually by the end of the 85-year term. If they will be considering that the income stream is increasing, I don't understand how come the estimated figure is so low?

But the rent won't be increasing in real terms, merely keeping up with inflation. They could bank the cash now and invest it in something else which would create the same (or better) return in real terms.

StableBond967

Albermarle said:

StableBond967 said:

eddddy said:

StableBond967 said:

I'm curious whether it would it be dependant on the current ground rent charge? If so all the more reason to ask for an assignment of benefit to get the ball rolling earlier, as I now expect the ground rent to rise to £188 in two years time.

For a statutory lease extension, the rationale behind the calculation of compensation for loss of Ground Rent is something like this:

How much would a rational investor pay today for the following income stream:

• £88 for the next 2 years
• £88 + RPI increase for the 21 years after that
• £88 + further RPI increase for the 21 years after that
• etc, etc

So if you did a lease extension today - a rational investor would take into account that the income steam is increasing in 2 years time (and 21 years after that, etc).

So doing the lease extension before or after the increase shouldn't make a significant difference.




In simple terms, the statutory lease extension process works like this (using made-up numbers) :

• The leaseholder (or probably their valuer) says to the freeholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £3k for that income stream - so I'm offering you £3k"

• The freeholder (or probably their valuer) says to the leaseholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £6k for that income stream - so I'm asking for £6k"

(And often the leaseholder and/or freeholder are bluffing/exaggerating, in the hope of getting a good deal etc.)

But it would cost the leaseholder and freeholder about £2k each to go to tribunal - and you can't recover those costs from the other party. So neither party wants to go to tribunal, because it's likely to be a waste of money.

So it can be a case of negotiating / arguing / bluffing until you agree on a price. 




In terms of how I reached my estimate... I initially based it on some past tribunal decisions, plus discussions I've had with a valuer about ground rents that increase with RPI. But that seemed to come out low.

So instead, I did a calculation on the assumption that the ground rent would roughly double at each 21 year review. 

Thanks for your guidance @eddddy.

Just so I'm 100% clear in my understanding here.

Assuming the RPI will increase the ground rent by 100% the annual payments over each rent review period are:

• £88 (until 2027)
• £176 (until 2048)
• £352 (until 2069)
• £704 (until 2090)
• £1,408 (until 2110)

This would total to £54,208 in payments made annually by the end of the 85-year term. If they will be considering that the income stream is increasing, I don't understand how come the estimated figure is so low?

Without even considering RPI increases, at £88 over 85 years it would total to about £7500. Because I am paying it off in one lump sum is it heavily discounted or something? Is it that the loss in ground rent charges is not considered as important as other factors like the length of the lease, or purchase price of the property when deciding the premium to pay the landlord?

Apologies if I'm not understanding right away. I just want to make sure I do before letting my solicitor how I will proceed

As the next increase is only in two years time, the total ground rent income over 85 years, taking inflation into account would be more like £11,000 than £7500 .

Right yeah that seems like a more realistic figure. I'm drafting up an email now and trying to decide how much of a price reduction I should be asking for here. My original plan was to ask for a £5000 reduction if an Assignment of Benefit could be carried out by the seller. This would allow me to extend the lease right way whilst the ground rent charge is only £88.24. If the seller doesn't want to go with an Assignment of Benefit, then I think I need to ask for a larger deduction as I'd need to wait two years before extending. I was thinking to ask for a £7500 deduction in that scenario but maybe that's too low.

saajan_12

user1977 said:

StableBond967 said:

eddddy said:

StableBond967 said:

I'm curious whether it would it be dependant on the current ground rent charge? If so all the more reason to ask for an assignment of benefit to get the ball rolling earlier, as I now expect the ground rent to rise to £188 in two years time.

For a statutory lease extension, the rationale behind the calculation of compensation for loss of Ground Rent is something like this:

How much would a rational investor pay today for the following income stream:

• £88 for the next 2 years
• £88 + RPI increase for the 21 years after that
• £88 + further RPI increase for the 21 years after that
• etc, etc

So if you did a lease extension today - a rational investor would take into account that the income steam is increasing in 2 years time (and 21 years after that, etc).

So doing the lease extension before or after the increase shouldn't make a significant difference.




In simple terms, the statutory lease extension process works like this (using made-up numbers) :

• The leaseholder (or probably their valuer) says to the freeholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £3k for that income stream - so I'm offering you £3k"

• The freeholder (or probably their valuer) says to the leaseholder "If this goes to tribunal, I think the tribunal would say that a rational investor would pay £6k for that income stream - so I'm asking for £6k"

(And often the leaseholder and/or freeholder are bluffing/exaggerating, in the hope of getting a good deal etc.)

But it would cost the leaseholder and freeholder about £2k each to go to tribunal - and you can't recover those costs from the other party. So neither party wants to go to tribunal, because it's likely to be a waste of money.

So it can be a case of negotiating / arguing / bluffing until you agree on a price. 




In terms of how I reached my estimate... I initially based it on some past tribunal decisions, plus discussions I've had with a valuer about ground rents that increase with RPI. But that seemed to come out low.

So instead, I did a calculation on the assumption that the ground rent would roughly double at each 21 year review. 

Thanks for your guidance @eddddy.

Just so I'm 100% clear in my understanding here.

Assuming the RPI will increase the ground rent by 100% the annual payments over each rent review period are:

• £88 (until 2027)
• £176 (until 2048)
• £352 (until 2069)
• £704 (until 2090)
• £1,408 (until 2110)

This would total to £54,208 in payments made annually by the end of the 85-year term. If they will be considering that the income stream is increasing, I don't understand how come the estimated figure is so low?

But the rent won't be increasing in real terms, merely keeping up with inflation. They could bank the cash now and invest it in something else which would create the same (or better) return in real terms.

Well if anything the rent is decreasing in real terms each year in between as there's no increase for 21 years, until it jumps back to par (ie equivalent to the starting amount in real terms). eg between 2028 and 2048, the rent is worth less each year than the £176 was worth in 2027. Then in 2049 it jumps back to a number thats worth the same as getting £176 in 2027. 

Assuming a linear RPI of 3.36% increase each year (which is equivalent to 100% increase in 21 years), this is what the payments are effectively worth in today's money: The total of the equivalent column is £10.3k. 

That's if you got all of the money exactly over the next 86 years. There's always the risk that something goes wrong.. building falls down, regulations change, leaseholder doesn't pay.. While there is recourse, its still hassle and uncertainty. Also the opportunity cost vs getting money now that they could invest in something that returns more than the 3.36%. So they'd probably take something less than the 10.3k in return for having money upfront. How much less is a question.. 

year	Actual	Equiv
1	88	88
2	88	85
3	176	165
4	176	159
5	176	154
6	176	149
7	176	144
8	176	140
9	176	135
10	176	131
11	176	127
12	176	122
13	176	118
14	176	115
15	176	111
16	176	107
17	176	104
18	176	100
19	176	97
20	176	94
21	176	91
22	176	88
23	176	85
24	352	165
25	352	159
26	352	154
27	352	149
28	352	144
29	352	140
30	352	135
31	352	131
32	352	127
33	352	122
34	352	118
35	352	115
36	352	111
37	352	107
38	352	104
39	352	100
40	352	97
41	352	94
42	352	91
43	352	88
44	352	85
45	704	165
46	704	159
47	704	154
48	704	149
49	704	144
50	704	140
51	704	135
52	704	131
53	704	127
54	704	122
55	704	118
56	704	115
57	704	111
58	704	107
59	704	104
60	704	100
61	704	97
62	704	94
63	704	91
64	704	88
65	704	85
66	1408	165
67	1408	159
68	1408	154
69	1408	149
70	1408	144
71	1408	140
72	1408	135
73	1408	131
74	1408	127
75	1408	122
76	1408	118
77	1408	115
78	1408	111
79	1408	107
80	1408	104
81	1408	100
82	1408	97
83	1408	94
84	1408	91
85	1408	88
86	1408	85

eddddy

StableBond967 said

Because I am paying it off in one lump sum is it heavily discounted or something? 

Yes - future ground rent is currently typically discounted at a cumulative rate of 6% to 7% per year for lease extensions.

And as @saajan_12 suggests, your ground rent isn't really increasing with RPI.

In simple terms...

• In 2027 you ground rent will increase to match RPI

• Then for the following 20 years, RPI will increase each year, but your ground rent won't increase each year. So it will drop behind RPI

• So for 20 years out of every 21 years, you will be paying less than an RPI adjusted ground rent

StableBond967

Hey everyone, thought I'd update you all as this post was of huge help to me in making my decision. I negotated a £4k price reduction to compensate for the ground rent element when extending the lease. I think this is a fair conclusion and I hope that I will be able to extend it right away, given the 2 year rule will be abolished sometime this year.

Big thanks to all your help, especially @eddddy, @anselld and @saajan_12 🙏