Purchasing leasehold with doubling ground rent

BinaryJava

Hi all,

We are interested in a flat but whilst speaking with the estate agent to put in our offer we were told to speak to a broker to see if a provider would give us a mortgage for it. Turns out the ground rent doubles every ten years and is set at £500 per year, so we would have a problem getting a lender.

What potential avenues do we have with going ahead to purchase this property?

I’ve seen three potential ways we could proceed:

1. We find a mortgage provider that will cover the ground rent conditions and eat whatever additional interest they may charge. Also we risk the resale of the property as any future buyer will also need to find a specific lender as well.

2. We discuss with the vendors if they can start negotiations with the freeholder to remove the doubling every ten years clause, and cap the ground rent to £250. Not sure what the legal/buyout cost to do this would be.

3. We request the vendors to extend the lease with a statutory lease extension, but since it’s an increasing ground rent I’m unsure if the cost would be feasible. Does anyone have a calculation to hand as to what this may cost? As part of our offer, we could maybe request the vendors cover this cost?

The property is valued at £245k, with 139 years left on the lease and a £89 a month service charge.

Do any of these stand out, or should we not go any further with this property?

eddddy

I think you might struggle to find a mortgage lender who will take that on.

If the ground rent is £500 per year and it doubles every 10 years - after 130 years it will be £4m per year.

Using the current statutory formula, a statutory lease extension might cost somewhere between £70k and £150k.


(In theory, capping the ground rent at £250 should be around £5k cheaper than doing a statutory lease extension. But it's down to negotiation.)


Some developers are 'voluntarily' cancelling doubling ground rents - but I guess the seller would have investigated this option. (I say 'voluntarily' - but they volunteered to do it because the Competition and Markets Authority [CMA] threatened them with legal action if they didn't.)
See: https://www.gov.uk/government/news/cma-frees-hundreds-more-leaseholders-from-costly-contract-terms

Sam_666

You realy have two ways to proceed.

1. proceed with purchase and burn away £245k
2. move on and find another property

FlorayG

No way. Never buy ANYTHING with a doubling obligation. Do you not know the story of the Persian king who wanted to reward someone, the person asked for a grain of wheat on the first square of a chessboard, two on the second, 4 on the third, doubling every square until the board was filled? The king agreed and was bankrupted.

HelpfulLittleHelper

year	per year	per 10 years	total
0	500	5000
10	1000	10000	15000
20	2000	20000	30000
30	4000	40000	60000
40	8000	80000	120000
50	16000	160000	240000
60	32000	320000	480000
70	64000	640000	960000
80	128000	1280000	1920000
90	256000	2560000	3840000
100	512000	5120000	7680000

As you can see starting with 500 now and doubling every 10 year gets expensive real quick and makes your place completely unsellable in the future (and depending on how long you're there maybe even unaffordable). You basically have paid the value of the house after 50 years in ground rent. And after that it completely goes into the stratosphere.

saajan_12

Some hyperbole in this thread.. the total paid over a 100 year period or even the annual in 100 years time is going to look high but is largely meaningless as thats in 2125 money. 

However doubling every 10 years is problematic.. its equivalent to a 7% annual increase (albeit only adjusted every 10 years so you do save a bit in between). Thats significantly higher than the average or target inflation numbers. So most lenders will have an issue with it. It may be tacked by the forthcoming legislation here, but until that arrives, we won't know the final state so I wouldn't rely on it entirely. 

I'd go for a lease variation to reduce it, and if the vendor refuse to kick off, then unfortunately I'd walk away in your place. Re whether you can get the vendor to pay - depends on if the 245k valuation takes that into account or not. If that's in line with other flats with a much lower ground rent, then they should pay since they have a substandard lease. If its much cheaper, then maybe this is why and you'd need to increase your offer if the lease issue gets resolved. All a negotiation. 

BinaryJava

saajan_12 said:

Some hyperbole in this thread.. the total paid over a 100 year period or even the annual in 100 years time is going to look high but is largely meaningless as thats in 2125 money. 

However doubling every 10 years is problematic.. its equivalent to a 7% annual increase (albeit only adjusted every 10 years so you do save a bit in between). Thats significantly higher than the average or target inflation numbers. So most lenders will have an issue with it. It may be tacked by the forthcoming legislation here, but until that arrives, we won't know the final state so I wouldn't rely on it entirely. 

I'd go for a lease variation to reduce it, and if the vendor refuse to kick off, then unfortunately I'd walk away in your place. Re whether you can get the vendor to pay - depends on if the 245k valuation takes that into account or not. If that's in line with other flats with a much lower ground rent, then they should pay since they have a substandard lease. If it’s much cheaper, then maybe this is why and you'd need to increase your offer if the lease issue gets resolved. All a negotiation. 

The estate agent has basically said the same thing to us today, that as part of our negotiation we should factor in getting the ground rent changed and having the doubling clause removed. He also said to have the ground rent reduced to 0.1% of the properties value so it isn’t a AST.

How much comes down to the doubling clause vs the 0.1% value? I’d say it’s the doubling clause that’s causing most of the problems here?

Going to get some advice from a solicitor on Monday to see what options might be available, and if they say to stay clear of it then that will make up our mind.

user1977

The AST bit is about to be abolished by the Renters Rights Bill, it's the remainder of leasehold reform which is a bit more up in the air.

eddddy

BinaryJava said:

The estate agent has basically said the same thing to us today, that as part of our negotiation we should factor in getting the ground rent changed and having the doubling clause removed. He also said to have the ground rent reduced to 0.1% of the properties value so it isn’t a AST.

There's a bit of confusion here. It sounds like 2 different issues are being muddled together.

• 1) Currently, the AST issue arises if the ground rent is over £250 (outside London) - not 0.1% of value

• 2) As a separate issue, some mortgage lenders won't lend where ground rent is greater than 0.1% of the property's value

But the AST issue is likely to disappear with new legislation, which is expected this year.


And as I mentioned, in theory, capping the ground rent at £250 would cost almost the same as doing a statutory lease extension (which would cap the ground rent at £0).

It should probably cost somewhere between £65k and £150k - depending on the type of development the flat is on.

But given the recent bad publicity about 'greedy developers charging onerous ground rents' - depending who the freeholder is - the freeholder might offer a better deal, to avoid further bad publicity.