Ground rent school boy error?

Reply to the comment left by BP Surrey at 03/04/2018 - 14:37
Absolutely, will do.

I still think that Freda is complicating matters unduly for Marcus. We are only talking about a property valued around £250k. If you look at any of the 2015 graphs Charles Boston, Knight Frank, Gerald Eve etc. they all level out around 100 years and at that point the relative percentage is close to 100%. The reduction at 95 years is going to be very minimal. When I produce my figures tomorrow both for the reversionary value and for the premiums for a statutory extension I will of course give the assumptions on what my figures are based. This case will not hinge on the reversionary value which will be a small part of the overall premium and will be quickly agreed by valuers on both sides. The major part of contention will be how to value the doubling ground rent and as to whether this kind of lease is highly desirable from an investor's point of view or quite the opposite as Savills reported last October when it prepared a 'state of the market' report for Ground Rents Income Fund plc. I will show various capitalisation/yield rates going from 5% to 9% which will illustrate a range from the worst outcome to perhaps the best outcome. You can check my figures if you like but you will find them error free. The last valuer I dealt with directly found no fault with my figures. It is not my intention to do you out of a job but just to give Marcus a realistic idea how much this might cost. I would point out that if you look on the Allsopp LLP auction website which sells freehold ground rent investments you will not see any 10 year doubling leases for sale. I have in the past seen 25 year doublers. Most investors nowadays I think prefer to buy 5 or 10 year RPI linked ground rents as they are more socially acceptable and less chance of future government legislation.

Give the advice, let Marcus decide for himself. As a block manager I have seen the formal route costs £1000’s more as the freeholders were willing to take far less but due to leaseholders taking advice to go formal route (lets face it, more money for surveyors and solicitors if they do) but yes you can get the ground rent to a peppercorn using the 1993 act. The informal costs the price of a stamp, if you have no joy thenby all means go formal and there is enough advice on here to inform Marcus how to do this.

Reply to the comment left by at 03/04/2018 - 15:57Thanks again, Im interested to see the figure you come up with.
I think your last sentence is interesting and something i have been considering; will the government intervene? i have heard possibly by end of 2018 they may push something through parliament making leases easier, cheaper for homeowners to renew - obviously no guarantee .. i could sit tight for a little while; that's something im also contemplating; however the flip side is it could increase the renewal further down the line

Hi Marcus, as promised here are my figures and here are my assumptions. These figures will give you some ideas and after discussion with your valuer may be helpful in deciding your best way forward.
I have assumed that the original lease was for 99 years because when the previous owner enquired about extending the lease the landlord probably resorted to the often used opening ploy of not giving a ‘proper’ lease extension but just extended the existing lease to bring it back to its original term of 99 years, which is a rubbish deal for any leaseholder, (ignoring the ground rent terms for a minute), because the lease will soon want extending again. This makes even more money for the landlord.
So I estimate the original 99 year lease probably started in 1982 and expired in 2081. You say that 4 years have gone of the new lease leaving 95 years left. Assuming the value of you property is agreed at £250k the reversionary value after 95 years, assuming a deferment rate of 5% will be £2,426. It’s only my opinion but I would apply for a 90 year lease extension which would continue after the original expiry in 2081. So it total you would end up with a 189 year lease (99+90), starting in 1982 and expiring in 2171. You will then have a lease with 153 years unexpired, so no worries about extending again for many years to come. When working out the reversionary value a small deduction is made for the reversionary value after 153 years. This figure is £143, so the net reversionary value to pay is £2,426 - £143 = £2283. As Freda mentioned there may be a very small adjustment for relativity but I doubt that this would add much more than about £100.
Moving now to the major part of the premium which is compensating the landlord for the loss of ground rent income for the remaining 95 years of your existing lease. For ease of calculation I have assumed that at every review a 100% increase in the ground rent is always going to be greater than a 10 year RPI increase.
When you value ground rents you value each income stream and add them all up. There is a principle of ‘present value’ involved which basically means that £100 in 10 years time is worth less than £100 now and £100 in 20 years time is worth even less. This is where yield or capitalisation rates come in. If interest rates and inflation are very low then money hold its value better. So low capitalisation/yield rates mean high premiums for freeholders. The converse is true when interest rates and inflation are high. So here are the 10 income streams for the landlord:
6 years at £250 p.a
10 years at £500 p.a. but delayed for 6 years
10 years at £1,000 p.a. but delayed for 16 years
10 years at £2,000 p.a. but delayed for 26 years
10 years at £4,000 p.a. but delayed for 36 years
10 years at £8,000 p.a. but delayed for 46 years
10 years at £16,000 p.a. but delayed for 56 years
10 years at £32,000 p.a. but delayed for 66 years
10 years at £64,000 p.a. but delayed for 76 years
9 years at £128,000 p.a. but delayed for 86 years

Here are the figures – I hope you are sitting down!
At a 5% capitalisation rate this part of the premium will be £68,284
At a 6% capitalisation rate this part of the premium will be £39,044
At a 7% capitalisation rate this part of the premium will be £23.715
At a 8% capitalisation rate this part of the premium will be £15,445
At a 9% capitalisation rate this part of the premium will be £10,748
If applying for a Statutory lease extension I would get my solicitor to put in £13,000 on the S42 application being £10,750 for the ground rent part and £2,250 for the reversion part.
The landlord’s valuer will probably come in around the 5% to 6% range. So allowing say £5,000 for 2 lots of solicitors bills + 2 lots of valuation fees, + the reversion of say £2,400 + the ground rent provisions I reckon you are looking at a minimum overall cost of £18,000 and a maximum of £75,000.

Bear in mind that if you accept a RPI linked lease instead then the current going rate or market value for these type of leases is around 40 x the initial ground rent. So the value of a £250 p.a. RPI lease will be worth around £10,000. This means that the true cost of escaping from the doubling ground rent provision should be in the £18,000 to £75,000 range less the £10,000 value of the RPI lease which the landlord will still retain. As this new RPI extended lease will be non-statutory, if you accept such an offer, get your solicitor to check that all the lease terms and conditions will be exactly the same as a statutory lease extension apart from the ground rent terms. I would not except a starting ground rent higher than £250 p.a. as some lenders don’t like the ground rent to be more than 0.1% of the property value and already you are on that limit.
Professional valuers are very keen on using ‘comparables’. In the case of your reversionary value they will look for recent sales of similar properties in the same block. Failing that, then similar properties in other block in the vicinity. When it comes to working out the premium for the ground rent then there will be no comparables. No such cases have as yet gone to the FTT. In the absence of comparables valuers fall back on trying to determine a fair market value, what an investor would pay, which will be a price agreed between a willing buyer and a willing seller. The full definition of a fair market value is amplified and refined in the RICS Red Book.
When choosing a valuer choose one with a positive attitude – if you get the kind of response like ‘Well interest rates are very low at the moment and these types of leases are very attractive to investors, but we will do our best to bring the premium down a bit for you’, then try another valuer.’
The kind of valuer you want is positive, enthusiastic and optimistic who is not going to settle for an easy compromise valuation with the landlord’s valuer. ‘These 10 year doubling leases are regarded as onerous – many lenders won’t lend on these properties. Government legislation may eventually force landlords to change these leases to RPI leases. Several property companies have already voluntarily changed the lease terms to RPI leases at no cost to leaseholders. Some pension funds like the John Lewis pension fund because of pressure from its own pensioners and customers have disinvested (sold) their 10 year doubling ground rent freeholds. Many investors now prefer to buy RPI ground rent freeholds’

Finally bear in mind that the freeholder will not really want to give you a new lease with a peppercorn rent – the gravy train will end for him. This is to your advantage. If pressurised he will give you 90 year extension with RPI increases at a reasonable price. As yet no case involving doubling ground rents has ever gone to the First Tier Tribunal. Your landlord will not want to the first one to take the chance of an unfavourable outcome. You should realise that a FTT decision only works one way to your advantage. If you like the result you can enforce a new lease at the premium determined by the FTT. If it is still too expensive then you can just walk away but you will of course still have to pay both sets of legal and valuation fees.
Every month you delay the cost of this lease extension will go up. Another advantage of getting your solicitor to serve a S42 notice is that it fixes the valuation date; the clock starts ticking.
Good luck for the future. By all means try the negotiated approach first but bear in mind that it will be in the landlord’s interest to let the matter drag on. IMO I don’t think you will get any sensible offers until you have served a S42 notice.
It would be interesting if you could post from time to time what progress you are making.
P.S. referring to your last post you could wait for government action to bail you out. It is relatively easy for governments to make changes to new leases and new properties, but existing leases? Warm words are cheap - will positive actions follow? I am well into my 70's and not sure whether I will still be around if and when changes happen, so I thought if I can get out reasonably cheaply I would follow that path.

Typo error - The clock STOPS ticking.

Reply to the comment left by at 04/04/2018 - 07:42
Well i appreciate all the time you have taken to put together the potential cost...Id like to say - is this a late April fools joke or early Friday 13th message..
Its certainly unpleasant to read....im fairly lost for words.
I suppose i cant proceed even if i wanted too as the potential cost is not something i sit on day to day...
i'll digest and have a think..

Sorry to be the bearer of bad news. It was no problem for me working out the figures - I quite enjoy messing about with spreadsheets. Realistically, and you could ask a professional valuer for a free second opinion before you even engage him or her but IMO I don't think you are going to get an extended lease and the doubling clause removed without paying the landlord at least a £10,000 premium. The landlord (or his solicitor) has been quite 'cute' with the ground rent terms - the RPI reference is really just a red herring, it's the 10 year doubling bit which is the killer. When he gave the 32 year lease extension to the previous owner he was definitely thinking not just of 'jam today' but also of 'jam tomorrow'. Around £5,000 is a realistic total for the fees on both sides. So I think you would need to budget at least £15,000. Don't be tempted just to try and remove the doubling clause without extending - the existing lease is far too short. You could wait for 1 year and see if any realistic measures to help you are announced by the government. I have just run my spreadsheet again showing the effect of a 1 year delay these are 5% £72015, 6% £40,983, 7% £24,961, 8% £16,262, 9% £11,297.

Reply to the comment left by BP Surrey at 30/03/2018 - 08:56
£5-7K sounds very good. The added value to the property would be well in excess of that. Of course, the landlord has to agree, and most won't!

LVW4 - You have commented without reading this whole thread. BP did post 'the Leasehold Advisory Centres online calculator suggests the cost of extending the lease by 90 years and eradicating any further ground rent payments to be between 5 & 7K.' This might well have been the cost of extending a lease which is fixed at £250 per annum for the whole term but not for a lease which doubles every 10 years and reaches £128,000 per annum during the last 9 years of the lease. There are no readily available on-line lease premium calculators which can take into account increasing ground rents. This lease could cost between £13,000 and £70,000 + about £5,000 in fees to extend by 90 years if a peppercorn (zero) ground rent is wanted.