Ground rent increase every 5 years with RPI - sound okay?

black_wings · 22 April 2017 at 3:25PM

Hello folks,
As live inside the m25 we cannot afford a house so leasehold flat is our only option. We have just received the following details for our ground rent - should we be alarmed by this or does it sound okay? My main concerns are all the negative press recently regarding ground rent and worried about the future resale of the flat. We plan to only live in the flat for about 5 years so resale value is important to us. The lease is for 250 years and the starting ground rent is £250. The ground rent will increase every 5 years linked to RPI. Is this worse or better than increases every 10 or 20 years or does it not matter how often it is reviewed?

Any thoughts welcomed

Extract from the contract

"Reviewed rent shall be calculated by the following:
R x A/B
R= £250
A= most recently published RPI
B= index figure last published at the base date"

G_M · 22 April 2017 at 6:15PM

The more often it is reviewed, the faster it will increase!

When was the lease granted and what is the current ground rent?

Personally, I'd find somewhere else, but I know this is an increasing problem and you may have little choice.

black_wings · 22 April 2017 at 6:49PM

Thanks for the reply

The lease begins from Jan 2017 and the current ground rent is £250.
I'm struggling to get my head around it all to be honest.
I just don't want to find in 5 years that we will be unable to sell the flat. A flat is all we can afford. The alternative is to continue renting for another 5 years until we are ready to move north - which I am beginning to wonder if it's the safer option.

SalsaDanca · 22 April 2017 at 7:30PM

Traditionally, ground rents are doubled every 25 years. That's equivalent to an increase of just over 2.8% per year, which is about the same as inflation.

The problems that have been reported in the press recently are with ground rents that are doubled more frequently than once every 25 years. Doubling every 20 years is equivalent to an increase of 3.5% per year, which is a bit cheeky but probably still acceptable. Shorter periods are very expensive and likely to put off future buyers. Doubling every 15 years = 4.7%, 10 years = 7.2%, 5 years = 14.9%.

The ground rent on the flat you're looking at isn't going to double, it's going to go up by RPI. That shouldn't be a problem.

black_wings · 22 April 2017 at 8:31PM

Thanks for the thoughts Salsa.
Just reading the schedule again. The complete wording is:
"The reviewed rent shall be computed by the formula R x A/B

R = the rent payable for the first rent period
A = the most recently published figure for all items index of the RPI
B= the index figure last published at the base date

I'm having trouble working out how exactly the calculation looks for the increases.
1. Will R will always be equal to £250 because this is the 'first rent period' of the lease? Therefore maintaining R as £250 help to keep increases down?
2. Would the 'base date' from which B is calculated be the RPI index from the start of each rent review period or from the start of the lease does anyone know?
As that would surely be fairly worrying? Because if B always remains the same throughout the lease then during each 5 year review period there will become a larger and larger difference between A and B as time goes on.
I hope that makes sense but it's fairly possible I haven't explained what I mean very well.

davidmcn · 22 April 2017 at 8:43PM

black_wings wrote: »

"The reviewed rent shall be computed by the formula R x A/B

R = the rent payable for the first rent period
A = the most recently published figure for all items index of the RPI
B= the index figure last published at the base date

I'm having trouble working out how exactly the calculation looks for the increases.
1. Will R will always be equal to £250 because this is the 'first rent period' of the lease? Therefore maintaining R as £250 help to keep increases down?
2. Would the 'base date' from which B is calculated be the RPI index from the start of each rent review period or from the start of the lease does anyone know?

What exactly are you quoting from? The "base date" should be defined somewhere. It ought to be the start of the lease i.e. the first rent period.

black_wings · 22 April 2017 at 8:47PM

davidmcn wrote: »

What exactly are you quoting from? The "base date" should be defined somewhere. It ought to be the start of the lease i.e. the first rent period.

It says the base date is Jan 2017.
So my concern is that in say, 50 years time, the difference between the current index and the 'base date' index will be fairly considerable!
But that may be be slightly offset if R always remains at £250?

davidmcn · 22 April 2017 at 9:11PM

black_wings wrote: »

So my concern is that in say, 50 years time, the difference between the current index and the 'base date' index will be fairly considerable!

Well, yes, that's how inflation usually works! Prices from 1967 look considerably lower than today's, but in real terms aren't.

black_wings · 22 April 2017 at 9:21PM

davidmcn wrote: »

Well, yes, that's how inflation usually works! Prices from 1967 look considerably lower than today's, but in real terms aren't.

Haha yep appreciate that for sure

So please bear with me as this is just as an example; is this correctly calculating the ground rent for the 50th year. Let's say the index at Jan 2017 is 265 and the index at Jan 2087 is (let's pretend) 700 then the rent calculation for the 50th year would be:
£250 x (700/265) = ground rent for 2087 would be £660.
As I am assuming that R and B always remain the same throughout each rent review period but it's not 100% clear to me if it is. Because it says 'B is the index figure last published at the base date'. I don't understand why they would say 'last' published if it was to always remain the same, the wording 'B is the index figure published at the base date' would surely suffice.

davidmcn · 22 April 2017 at 9:30PM

black_wings wrote: »

is this correctly calculating the ground rent for the 50th year. Let's say the index at Jan 2017 is 265 and the index at Jan 2087 is (let's pretend) 700 then the rent calculation for the 50th year would be:
£250 x (700/265) = ground rent for 2087 would be £660.
As I am assuming that R and B always remain the same throughout each rent review period but it's not 100% clear to me if it is. Because it says 'B is the index figure last published at the base date'. I don't understand why they would say 'last' published if it was to always remain the same, the wording 'B is the index figure published at the base date' would surely suffice.

"Last published" because it is always a bit behind the times e.g. the last published figure at the moment is for March 2017. If they said they wanted the index figure for 22 April then we'd need to wait until some time next month for them to publish it. It's easier just to use the last published figure, as long as you do the same at the other date in your calculation.

Your sums are right, by the way.

always_sunny · 22 April 2017 at 9:45PM

can you not extend the lease via statutory right after 2 years and get the ground rent to nil?
Is it a new build? Sounds like very long lease and expensive too.

PLEASE READ BEFORE POSTING

Ground rent increase every 5 years with RPI - sound okay?

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