Escalating ground rent - RPI

crichvb

I've recently had an offer accepted (£320,000) on a flat with an escalating ground rent clause and I'm unsure whether this could cause issue later down the line when it comes to selling.

The ground rent is currently £500 PA, increasing every 10 years inline with RPI. The next review date is December 2026. This will be the first increase since the flats were built around 8 years ago.

My mortgage advisor doesn't seem to think the clause is an issue as three big high street lenders re happy with terms and are willing to lend.

My concern is that when the ground rent increases in December 2026 it will increase to roughly £700 PA which is close to the £1000 AST threshold.

The estate agent may propose proceeding with a deed of variation to the seller but given this isn't a current requirement from my mortgage lender I'm unsure whether the freeholder would accept those terms.

Do these terms sound reasonable or is this something I should consider walking away from?

user1977

The “AST threshold” is about to be abolished by the Renters Reform Bill - no guarantees about when that will come into force but I would doubt it will still be an issue by Dec 2036.

FlorayG

Someone please explain this 'AST threshold'? I've not heard of it

saajan_12

There's generally two issues with escalating ground rents
(1) Above inflation increases. Eg doubling every 10 years could sometimes become a very high increase relative to inflation. You're fine here as its specifically pegged to equal the inflation. 

(2) Over £250 / £1000 annual rent, meaning AST laws and evictions apply. While no one knows what inflation will be in the next 1.5 years, if its ~£700 in 2026, then it would take until at least 2036 before it goes above the £1000 threshold. The reform bill is very close to passing and is expected to eradicate this issue in the next few months / year. You likely have a 12 year buffer, but even a 2 year buffer before this point is likely plenty. 

eddddy

crichvb said:

I've recently had an offer accepted (£320,000) on a flat with an escalating ground rent clause and I'm unsure whether this could cause issue later down the line when it comes to selling.

It's not really possible to predict if/how mortgage lending criteria will change in future years.

On the plus side, legislation is expected this summer which will get rid of the £1000 AST threshold - so that may become less of an issue for mortgage lenders.

You could also reduce the ground rent to zero by doing a 'statutory lease extension' - but under current legislation, I suspect that might cost around £30k to £40k.  (So you could argue that this flat should cost £30k to £40k less than a similar flat with zero ground rent.)

Further legislation is being discussed, which might (or might not) reduce the cost of reducing the ground rent to zero - but there is no timescale for this yet.

crichvb said:

The estate agent may propose proceeding with a deed of variation to the seller but given this isn't a current requirement from my mortgage lender I'm unsure whether the freeholder would accept those terms.

What variation to the lease are you suggesting? A variation to change the ground rent? Or a variation to deal with AST possession risks? e.g. Giving notice to a mortgage lender before legal action is taken.
 

crichvb

If your ground rent is above the £250 threshold (or £1000 in Greater London) the lease may be considered an assured tenancy and in the event of you falling into 3 months of ground rent arrears, then your landlord has a right to repossess the property. For an assured tenancy a landlord can issue a notice to repossess the property under section 8 of the Housing Act 1988.

Some lenders are hesitant to lend on properties with rents in excess of £250 outside of London and £1,000.00 in Greater London due to the risk of possession by a landlord in the event of ground rent arrears. In fact, many lenders also prohibit lending where the lease provides for the ground rent increasing during the first 21 years of the lease.

FlorayG

crichvb said:

If your ground rent is above the £250 threshold (or £1000 in Greater London) the lease may be considered an assured tenancy and in the event of you falling into 3 months of ground rent arrears, then your landlord has a right to repossess the property. For an assured tenancy a landlord can issue a notice to repossess the property under section 8 of the Housing Act 1988.

Some lenders are hesitant to lend on properties with rents in excess of £250 outside of London and £1,000.00 in Greater London due to the risk of possession by a landlord in the event of ground rent arrears. In fact, many lenders also prohibit lending where the lease provides for the ground rent increasing during the first 21 years of the lease.

OMG yes I know about this for rental properties but I had no idea it could apply to a property you bought! thank you

crichvb

eddddy said:

crichvb said:

I've recently had an offer accepted (£320,000) on a flat with an escalating ground rent clause and I'm unsure whether this could cause issue later down the line when it comes to selling.

It's not really possible to predict if/how mortgage lending criteria will change in future years.

On the plus side, legislation is expected this summer which will get rid of the £1000 AST threshold - so that may become less of an issue for mortgage lenders.

You could also reduce the ground rent to zero by doing a 'statutory lease extension' - but under current legislation, I suspect that might cost around £30k to £40k.  (So you could argue that this flat should cost £30k to £40k less than a similar flat with zero ground rent.)

Further legislation is being discussed, which might (or might not) reduce the cost of reducing the ground rent to zero - but there is no timescale for this yet.

crichvb said:

The estate agent may propose proceeding with a deed of variation to the seller but given this isn't a current requirement from my mortgage lender I'm unsure whether the freeholder would accept those terms.

What variation to the lease are you suggesting? A variation to change the ground rent? Or a variation to deal with AST possession risks? e.g. Giving notice to a mortgage lender before legal action is taken.
 

To be honest I'm not entirely sure. When I raised my concerns to the estate agent his response was "It may look like I will have to propose to the seller to proceed with a deed of variation" which suggests to me that this may have been an issued that has come up before.

I suppose I will have to wait and see what they come back with.

crichvb

saajan_12 said:

There's generally two issues with escalating ground rents
(1) Above inflation increases. Eg doubling every 10 years could sometimes become a very high increase relative to inflation. You're fine here as its specifically pegged to equal the inflation. 

(2) Over £250 / £1000 annual rent, meaning AST laws and evictions apply. While no one knows what inflation will be in the next 1.5 years, if its ~£700 in 2026, then it would take until at least 2036 before it goes above the £1000 threshold. The reform bill is very close to passing and is expected to eradicate this issue in the next few months / year. You likely have a 12 year buffer, but even a 2 year buffer before this point is likely plenty. 

 user1977 said:

The “AST threshold” is about to be abolished by the Renters Reform Bill - no guarantees about when that will come into force but I would doubt it will still be an issue by Dec 2036.

This is interesting, thank you. I didn't know the Renters Reform Bill would also apply to leasehold owners.