Is this an "onerous" lease (regarding ground rent)?

roccatvulcan

Hi all,

I'm thinking about buying my first home, which would be a leasehold flat in NW England (this is what I can afford with a mortgage).

Recently I found an interesting one for just below £150k, which looks like a new(ish) build, and called the EA to ask for more information. Here's what I was told:

• Ground rent: £125 p.a.
• Number of years on lease: 130 in 2024

Upon asking further about the ground rent review, the EA sent me the following:

• Ground rent reviewed at a fixed interval of 25 years
• Next ground rent review: 2029
• On the review date, the rent shall be the greater of:
  (a) a sum equal to twice the Rent payable during the preceding 25 years; and
  (b) One thousandth (1/1000) part of the "capital value" which expression shall mean the price which could be obtained in the open market for a lease of the Property for a term of 250 years but otherwise upon the terms of this Lease and on the assumption that the Property the Block and the Development are in good and complete repair

I'm just assuming here, but the above tells me that the building got built/leased in 2004 for 150 years for an initial annual ground rent of £125. Upon first read, this seems to be okay, as the annual ground rent is currently £125, point (a) states it doubles in 25 years (which is much better compared to 10-15 years), and I believe point (b) is the typical "0.1% of value".

However, the more I think about it, the more I start to believe that it's not that great after all, and it could cause issues, both for my mortgage application and myself, as early as 2029. I fear it might be classed as "onerous" by lenders, and refuse my application. I tried to research it more on my own, and the rules vary between lenders, but some red flags are usually:

• any ground rent above £250;
• anything above 0.1% of value.

It's not totally clear whether the above is meant for just the mortgage period (which in my case would be between 15 to 20 years), or the whole term of the lease, I guess it "depends", but in worst case, it's probably for the whole length of the lease.

As I see it, the problem is that there's no upper cap for the double increase stated in point (a), and that the ground rent would be the greater value of (a) and (b). Even if I get a mortgage, it might cause issues for me. As I don't know how to calculate (b) precisely, there's a chance that the ground rent could get to £251 or above as early as 2029. This might cause problems during the remortgage period in 2030 (if I take a fixed 5-year deal initially). Also, selling the flat in something like 15-20 years could be a problem too, because the value of leasehold properties apparently start to decrease once the number of years on the lease goes below 130, and buyers might not like the fact the ground rent will get to £500 (minimum) in the next review period, unless I decide to extend the lease, which is not something I would like to do, as it might be very expensive.

Do you believe lenders would classify this lease as "onerous" and reject my application, or do you believe I'm overthinking it and the ground rent rules in this lease are actually fair and typical?

Any help regarding calculating (b) would be great too

Thank you

eddddy

One way of looking at this is:

Get an estimate of the current cost of a lease extension (which would reduce the ground rent to zero) and add up to £4k in fees. Let's say that totals £12k.

So if you think the flat is worth £150k with zero ground rent - you could try offering £15k to £18k less than that, so you make a small profit on the deal.

(But maybe the £150k asking price is already adjusted downwards for that reason. If it had zero ground rent maybe it would be on the market for £160k or £165k)


But you'd probably need the extension costs in cash - it would be difficult to get that added on to a mortgage.

Also, there are some lease extension reforms planned - but tbh, it's not clear when, and it's not 100% clear whether they would reduce or increase the cost of your lease extension.


Have you looked here to see what the lenders say about acceptable ground rents?  https://lendershandbook.ukfinance.org.uk/lenders-handbook/englandandwales/question-list/1852/

roccatvulcan

Thanks eddddy for the reply.

The price of the flat got reduced this week already, so it's below 140k now. Although I had no plan to do a lease extension, it seems I would need to do this by 2030 before the mortgage 5-year deal would end. If I get a mortgage in the first place...

It seems highly likely that the ground rent provisions that I mentioned in my previous post are indeed onerous, and lenders won't accept it under these terms, but hopefully something like an indemnity policy insurance or a deed of variation will increase their confidence - if the seller is open to these suggestions. If not, he might need to accept that only cash-only buyers will be able to make offers.

We'll see...

Sistergold

Hello OP, for me I think a doubling ground rent is to be avoided at all costs. So £125 jumps to £250, then to £500 then to £1000 then to £2000 then to £4000 then to £8000 then to £16000? I think it’s onerous. As it’s a flat there will be service charges to pay aswell. It all becomes too much and difficult to sell down the line. 🤷‍♀️

user1977

Sistergold said:

Hello OP, for me I think a doubling ground rent is to be avoided at all costs. So £125 jumps to £250, then to £500 then to £1000 then to £2000 then to £4000 then to £8000 then to £16000? I think it’s onerous.

It depends on the frequency, surely? Every 25 years is (roughly) not that far adrift from historical inflation. Others double as frequently as every 10 years which is certainly over the top.

But (if anything) preferable to have a review method which is actually linked to general inflation or property values, like the second part of the clause (but better to just to stick to that rather than allow the landlord to pick the highest value).

roccatvulcan

Sistergold said:

Hello OP, for me I think a doubling ground rent is to be avoided at all costs. So £125 jumps to £250, then to £500 then to £1000 then to £2000 then to £4000 then to £8000 then to £16000? I think it’s onerous. As it’s a flat there will be service charges to pay aswell. It all becomes too much and difficult to sell down the line. 🤷‍♀️

It's obvious to me now that this apartment would require a statutory lease extension in the next couple of years, which would bring the ground rent to effectively zero.

Leasehold properties are cheaper for this very reason, freeholds are basically double the price in this area. But this is what I can afford.

Sistergold

roccatvulcan said:

Sistergold said:

Hello OP, for me I think a doubling ground rent is to be avoided at all costs. So £125 jumps to £250, then to £500 then to £1000 then to £2000 then to £4000 then to £8000 then to £16000? I think it’s onerous. As it’s a flat there will be service charges to pay aswell. It all becomes too much and difficult to sell down the line. 🤷‍♀️

It's obvious to me now that this apartment would require a statutory lease extension in the next couple of years, which would bring the ground rent to effectively zero.

Leasehold properties are cheaper for this very reason, freeholds are basically double the price in this area. But this is what I can afford.

You are right, it’s what makes the leasehold cheaper. So I guess if you like the flat then just go for it? 

Katiejane13uk

There is no consistency with lenders.  We are finding lots of examples in the National Leasehold Campaign (NLC) of sales falling through because lenders will not lend on any ground rent that continues to increase.  Lots of the lenders are asking for a 'Deed of Variation'.  Leasehold is a licence to print money and leaseholders are left wide open to being exploited.  Lenders have become much more aware of the racket and are cautious to lend.  Add on the additional costs of exploitative service charges the list of issues is endless.

roccatvulcan

Katiejane13uk said:

There is no consistency with lenders.  We are finding lots of examples in the National Leasehold Campaign (NLC) of sales falling through because lenders will not lend on any ground rent that continues to increase.  Lots of the lenders are asking for a 'Deed of Variation'.  Leasehold is a licence to print money and leaseholders are left wide open to being exploited.  Lenders have become much more aware of the racket and are cautious to lend.  Add on the additional costs of exploitative service charges the list of issues is endless.

Unfortunately yes. My limited research tells me that there are lenders which are not that strict regarding ground rent, and Halifax pops up quite often as a good choice. I have no proof, this is based on what I've read. Hopefully a mortgage advisor would be able to suggest lenders who are less strict with leasehold ground rents.

Yes, many lenders would require a deed of variation or an indemnity policy insurance. It seems that an indemnity policy in this case could be a good compromise, as it's not that expensive and it's relatively quick. But of course, all these are temporary measures, and the real solution is a statutory lease extension, bringing the ground rent to effectively zero, which should be done not long after the property purchase, so it doesn't cause an issue when remortgaging or when the ground rent is being reviewed.

Even with a lease extension fee included, leaseholds are still a lot cheaper in my area compared to freeholds. And there are many like me who can only afford a leasehold. Basically we don't have a choice. So if lenders would completely stop offering mortgages for leaseholds, that might become a scandal.

RHemmings

user1977 said:

Sistergold said:

Hello OP, for me I think a doubling ground rent is to be avoided at all costs. So £125 jumps to £250, then to £500 then to £1000 then to £2000 then to £4000 then to £8000 then to £16000? I think it’s onerous.

It depends on the frequency, surely? Every 25 years is (roughly) not that far adrift from historical inflation. Others double as frequently as every 10 years which is certainly over the top.

But (if anything) preferable to have a review method which is actually linked to general inflation or property values, like the second part of the clause (but better to just to stick to that rather than allow the landlord to pick the highest value).

Some lenders do not like doubling ground rents even if the doubling frequency is long and probably less than inflation. There have been cases on here before where it was mentioned that 25 year doubling ground rents were a problem. Particularly if it's possible that the ground rent will go over £250 outside London or £1000 in London within the forseeable lifetime of the mortgage. 

EDIT: In another thread, @eddddy says that ground rents doubling every 25 years are not usually a problem for mortgage lenders. I'm sure I looked into a case here that someone bought up where such was a problem for at least some lenders. And the key factor was that the ground rent was going to make the leasehold an AST as the next doubling was 10 years away. 

user1977

RHemmings said:

user1977 said:

Sistergold said:

Hello OP, for me I think a doubling ground rent is to be avoided at all costs. So £125 jumps to £250, then to £500 then to £1000 then to £2000 then to £4000 then to £8000 then to £16000? I think it’s onerous.

It depends on the frequency, surely? Every 25 years is (roughly) not that far adrift from historical inflation. Others double as frequently as every 10 years which is certainly over the top.

But (if anything) preferable to have a review method which is actually linked to general inflation or property values, like the second part of the clause (but better to just to stick to that rather than allow the landlord to pick the highest value).

Particularly if it's possible that the ground rent will go over £250 outside London or £1000 in London within the forseeable lifetime of the mortgage. 

Note those limits are just about to be abolished by the Renters' Rights Bill.