Ground Rent increases – Are they a big risk?

Ground Rent increases – Are they a big risk?

7:38 AM, 10th April 2014, About 8 years ago 26

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Hi

We are in the process of buying a brand new property with Redrow. Looking into the conditions of the lease it has been specified that the Ground Rent will start at £400 per year increasing to double at year 10 and consecutively doubling every 10 years for 5 consecutive times. Ground Rent increases

We are a bit concern as it seems a bit worrying. Looking around to say than in 10 years time the Ground Rent is going to be £800 per year and then £1600 in 20th anniversary till become £12,800 at 50th anniversary doesn’t seem to be a good deal.

Could this clause put people off of buying the flat in the future? Are these amount extortionist or are we been over caution worried and this instead has became the normal practice and it is something we are going to find everywhere else.

Just to note the lease here is for 999 years.

Any advice or comment would be appreciated as we need to exchange contracts today or tomorrow.

Thanks

Tiko Taylor



Comments

by Maria O'Neill

8:17 AM, 10th April 2014, About 8 years ago

I'm no expert but this seems extortionate to me! We have a couple of Redrow flats and are paying nothing like the amount you state. You don't say where the flat is located, if it's London or South East then maybe it's to be expected. Is there a sealing on increases? as I think it could be a 'put off' for future buyers .

by Peter Hindley

8:35 AM, 10th April 2014, About 8 years ago

If I remember correctly, the value of money halves every 10 years with 7% inflation. So I guess it depends, to some extent, on your view on future inflation.

by Andrea Mondelci

8:38 AM, 10th April 2014, About 8 years ago

The same happened to me and in the end I decided not to proceed with the purchase. The reason why is because I calculated the present value of all the future payments imposed by the lease (assuming an inflation stable at 2%, the current BoE target rate and a lease length of 100 years) and compared it to the present value of what I consider more of a standard lease, i.e. one starting at £250 and doubling every 25 years.

The result was staggering to me as the proposed lease was about £50k more expensive in present value terms than the standard one, or in other terms I should have commanded a discount of at least £50k to allow for such lease terms given that when I bid for the flat I assumed the lease was a standard one.
Given the agreed purchase price was £165k I thought there was not much point in entering any kind of negotiation and simply decided to walk away.

Anyway before just to be sure I asked my solicitor for her opinion and she also advised me to walk away as a contract like that will increasingly shift the ownership from the leaseholder to the landlord.

So in short my answer is that in my view yes, such terms will put off potential buyers in the future as it did to me.

Hope it helps,
Andrea

by Industry Observer

9:19 AM, 10th April 2014, About 8 years ago

I guess it depends on some extent on legality of the clause!!!

The point here is it isn't just a one off payment in year 50 of £12,800 it is £12,800 every year from year 50 until year 999 or freehold is bought by an owner.

Very unattractive to any future buyer only choices are to get it renegotiated (very unlikely) or buy something else.

Out of curiosity did your solicitord draw your attention to this clause?

by Michael Barnes

9:23 AM, 10th April 2014, About 8 years ago

7% per year seems a bit excessive to me, but does it state anual increases or increase every ten yeras? The latter is not quite so bad.

If you can buy the freehold with the other leaseholders, then you can set your own ground rent. You would need to do the sums to determine where break-even point would be and whether it is worth the capital outlay.

Final suggestion: ask your solicitor.

by Industry Observer

9:36 AM, 10th April 2014, About 8 years ago

But you can't buy the freehold initially or for some time, can you?

The more I think about it the more this sounds like a poison pill clause and coule be challenged as it makes the flay unsellable.

There was a case about 15+ years ago now where clauses in the schemes where you invested for 5 or 6 years in anything from ostrich farms to property. Forget what they were called Brown scrubbed them in his first budget, had a clause where in year 6 the rent doubled thus forcing tenants out so units could be sold to repay investors.

Oh what were they called it is driving me nuts they were a money making machine for higher rate taxpayers!! Mind you the property ones fell down because of the 1988 price falls.

Anyway that rent increase clause was ruled illegal in the High Court I am surprised on basis of that case that this provision is in the lease as it is only another form of rent.

by Ian Ringrose

9:55 AM, 10th April 2014, About 8 years ago

There is another side to this.

To many lease have such low ground rent that is it not worth the while for the freeholder, then you get the issues of absent freeholders etc.

I hit this on a property when the ground rent was £15 a year, set in the 70s with no provision to increase it. The company that owned the freehold just went into receivership, leaving costly legal bills and very few BTL lenders for anyone that wishes to buy one of the leases.

However I agree that with current rates of inflation doubling the ground rent every 10 years seems way too much, but can you name an index that will be about in 999 years time that the rent could be linked to?

by Industry Observer

9:57 AM, 10th April 2014, About 8 years ago

TYhought

If this increase is linked to some formula is there any chance that it could produce a negative result, meaning a reduction?

Unlikely and most such clauses only ratchet one way, as rent increase clauses do. Just a thought.

ASnother very good reason never to buy leasehold though if you can avoid it.

by Peter Hindley

10:09 AM, 10th April 2014, About 8 years ago

I did read a report in the Telegraph that average inflation for the next 50 years is predicted to be 4% per annum. Probably more chance of winning the Lottery than predicting this accurately though.

by Shakeel Ahmad

11:05 AM, 10th April 2014, About 8 years ago

Besides the inflation. This makes is very attractive to sell the Freehold at a much higher value, with the potential of higher ground rent.

Most modern blocks will have a clause of revaluing the ground rent every so often
(say 25 years) . This means that a surveyor will get involved his fees will have to be paid plus the VAT on his fee and there will still be uncertainty as to what the future ground rent will be.

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