Ground rent school boy error?

Reply to the comment left by Marcus at 04/04/2018 - 14:33Marcus
I recommend that you invest in a proper valuation and then have a think, when you have a sound basis for review. You will also have the comfort of knowing that the person who has advised you has done so with a) all of the facts regarding the lease and values at that point in time; and b) has Professional Indemnity Insurance.
Please do not make the mistake of delaying due to fear (as it will likely cost you more as values rise and the lease term diminishes) or relying upon what you read in this thread, as we do not have all the facts.
Freda

Freda is correct of course - in order to proceed you will need a solicitor and your own valuer. However unless I am mistaken, and I have misread the situation, I think Marcus's main problem is that he is staggered by how much it might cost him and whether he can afford it and he doesn't really know if he is able to proceed. So he really needs some ideas of upper and lower figures before he spends any money and starts the ball rolling? If I were Marcus, rather than paying out £500 to £600 + vat to a valuer just to confirm he can't afford to go ahead he could approach it this way : Ring up a few valuers with all the lease details including the onerous lease terms. Explain you are in a very difficult position not only because of the doubling ground rent part but the existing lease is quite short. Explain that a friend of yours who uses spreadsheets has told you that to go for a 90 year statutory lease extension will be very, very expensive. Your friend says that even at a 6% capitalisation rate, because of the doubling ground rents of the existing lease, which rise to £128,000 for the last 9 years, the premium could be around £40,000. Does the valuer think that this figure sounds about right?
Second question - Your friend thinks it will be obviously cheaper to still extend the lease but still carry on paying some ground rent to the landlord but only the £250 increasing every 10 years by RPI . Your friend thinks you will do well if you can get this for only a £10,000 premium to the landlord - do you think this figure is realistic or should I allow more?
Last question - your friend who recently has done two lease extensions advises me that I should allow about £5,000 to cover two lots of legal fees, and two lots of valuer's fees - is this about right?
There is no point at this stage Marcus paying and engaging a valuer to find out that even the cheapest option is going to cost around £20,000, if Marcus hasn't got anywhere near that amount and doesn't want to borrow the money.

Marcus

We have insufficient information to verify whether Silversurfer’s figures are correct, so we don’t know yet whether or not the premium to extend the lease is affordable.

I do not agree with the suggestion to ring round some valuers; you would not expect a solicitor or accountant to work for free, so why should a valuer? One is asking for the benefit of their time, qualifications and expertise, and this is a complex calculation. In my view, it would be wise to obtain a formal report, and only then can you give proper consideration to the matter. If you have insufficient funds now, the premium will only rise over time with rising values and as the lease term diminishes. If you wish to sell the flat at any time you may find yourself constrained (with the property unsaleable or the value materially reduced) by the current lease terms, so it all points to dealing with it sooner rather than later.

You may wish to consider obtaining further borrowings (your mortgage company may be a good place to start as they may look favourably on such an application in the circumstances) and you will likely need a formal report to present to them.

Personally I would not wait for any government action as it could be years away, if ever.

Best of luck.

Freda - I don't think you are giving best advice here. If you engage a solicitor you ask for an estimate of likely costs. If you thinking about using an accountant for doing your books for a small business you would ask for an estimate first.
How can anyone decide if they want to go ahead with a lease extension without any idea of the overall cost? If the estimate is excessively high the homeowner may decide not to bother or perhaps sell the property. You would not expect to pay for an estimate. Pay your fee by all means, yes, if you are given firm instructions to go ahead.
You seem to take delight in making valuation seem like some kind of black art shrouded in mystery which only a fully qualified RICS valuer is able and allowed to work out. It is a complex calculation but a good knowledge of spreadsheets make the task easy both for the reversionary value and the premium for the doubling ground rents. Or do you still use pen and paper and a pocket calculator? Spreadsheets provide all the figures needed for simple cases which don't involve any marriage value and little relativity. It's a bit like saying you must use an accountant to do your tax returns if they are complicated and involve things like letting property and capital gains tax returns.
'Yes, we do in fact have sufficient information to verify whether Silversurfer's figures are correct.' Assuming Marcus has given us the correct information then my figures without a shadow of a doubt are definitely correct. He has already told us the salient points of his current lease. 99 years starting at £250 p.a. and doubling every 10 years. Marcus has told us 4 years have already gone. As you well know it will make little difference to the figures I have calculated whether it's 3.75 years gone or 4.25 years gone. If you don't agree with my figures for the 5% to 9% range then why don't you produce your own, it will only take you about 15 minutes on a spreadsheet? If you produce nothing, other than to tell people to shell out on valuers fees first, then we can only assume that you do agree with my figures. I produced my figures just to show Marcus how expensive a Statutory Lease extension could be. I gave a range, and a professional valuer would be more knowlegeable about which figure in the range, perhaps from previous negotiations on other cases, which figure is likely to be the most relevant. I also produced figures showing the effects of a 1 year delay in applying for a Statutory Lease extension.
Possibly the only thing I agree with you on your posting is that helpful government action may be a long time coming. Having said that politics has been full of suprises recently.

Silversurfer:

Of course you would ask a professional for an estimate of costs, but you would not expect an accountant for example to immediately tell you the amount of tax you had to pay. They would need to study the documentation before advising. This is no different. It is unrealistic (and unwise) in my view to expect a valuer to give an instant response given the complexity of these circumstances.

Ultimately, they could be held to account in any representations with the FH’s valuer or at Tribunal and will require to have carried out the research and calculations. This combined with the fact that they can be sued for incorrect or inadequate advice is a valuable reminder to valuers for not advising with inadequate information and is the premise I work on. Perhaps this is where we differ.

I have no need to prove my qualifications and experience, nor am I suggesting valuation is a ‘black art’, rather it is an exercise that should be carried out with proper diligence and care, particularly when advising others.

I agree with much of what you say in your posts and clearly you have done a lot of research into the matter. You say that you have carried out two lease extensions; however that does not make you an expert, nor does it give you the credentials to advise others: “my figures without a shadow of a doubt are definitely correct”.

I beg to differ. I maintain that we do not have all of the relevant information; do we have for example the property value? No. We have only another poster’s suggestion at £250k. This is a fundamental input into the valuation, and no meaningful figures can be produced without that. There are other missing elements but there is nothing to be gained by listing them here.

This thread is not a chest-thumping exercise to show how much we know about valuations for lease extension, it's about helping Marcus to do the best thing to resolve his problem, and that is what I am endeavouring to do in urging to him take advice from an appropriately qualified and experienced person. Only then can he properly appraise his next course of action.

I sincerely hope that he does not listen to your "advice" because if, based on inadequate information, you have steered him incorrectly and deterred him from taking further action in the short term, you will have done him a huge disservice, even if the intentions are good.

Finally, and incidentally:
a) based on the limited information we have here, and making certain assumptions, I do not agree with your figures; and
b) I do use spreadsheets - which are only as good as the inputs and formulae put into them. Garbage in, garbage out, as they say.

This is the last word from me on this thread, I'm out!

You have failed to produce any figures for a statutory lease extension or challenge mine. You know the basic relevant facts but you fail to disprove my figures or publish your own. You say you have used the same limited facts as me but you still say that my spreadsheet is wrong. This is the spreadsheet I used for my last lease extension which was carefully scrutinised by the last professional valuer working for my landlord. We can all draw our own conclusions from your reticence.
You have some misconceptions about the law. You cannot be sued for giving someone an approximate price range over the phone if you qualify that by saying you can only produce a more detailed estimate if you are engaged and carry out a survey, more research and detailed calculations.
Quite honestly some of what you have just posted borders on being dishonest and very misleading. As you should know, the value of the property in this case is almost irrelevant as it will only be needed to work out the value of the reversion. Even if the property were valued at £350k it would only add about £1,000 to the value of that part of the premium for the reversion. It is now obvious to anyone that has followed this thread, even to you, that the premium to compensate the landlord for all that doubling ground rent is going to be much, much greater than the smaller amount for the reversion. THE PREMIUM TO COMPENSATE THE LANDLORD FOR THE LOSS OF GROUND RENT DOES NOT BEAR ANY RELATION TO THE VALUE OF THE PROPERTY. Sorry to use capitals but it does not alter the valuation of the ground rent terms whatever the value of the property. Surely you know that? The last lease extension I did was for a 10 year doubling ground rent and my apartment was valued around £400k. It would have made no difference whatsoever to £36,000 S45 counter notice received from my landlord if my flat had been worth £250k or £550k. The landlord would not have thought 'this chap's flat is only worth £250k, let's knock a bit off for him. Or alternatively, his flat is worth £550k let's bump the premium up a bit.'
The lease premium would be agreed between the two valuers on comparables. In these kind of cases were there are few comparables the lease premium would be based on its investment value to an investor.
You hopefully understand about the concept of goodwill as pertaining to a business. This means that people come back to you because the like you or your services or your attitude. Imagine some one rings up 3 valuers about a lease extension. The first two say we can't give you any information at all unless you give us some money. The third one is more chatty and friendly. 'I can't tell you the exact price for your lease extension but I can tell you roughly what it will cost based on similar ones I have done recently. It should be between £15,000 to £22,000. I can't give you a more accurate estimate until I've done a survey and done more detailed calculations.' The person is relieved that it looks like he might get his lease extension for under his £25,000. Difficult question coming up now for everyone - which valuer do you think will get the business?
I had my own business for 27 years. A lot of the time I gave out free advice and was not paid for it, but customers came back and sometimes they bought stuff. I sold my business and retired at the age of 54.

My final comment. I omitted to say that in my last lease extension when I dealt with one of the senior partners of the valuers acting for the landlord i did not just send him my figures for 5%,6%,7% etc, I actually attached my Excel spreadsheet as an attachment to my email. So he could see all the income streams and all the formulas in the cells. The formulas were not hidden - I had nothing to hide. I think it is very cheeky of you to say my spreadsheet is wrong without any evidence or producing your own. If you post your company name I will email it to you as an attachment.
I have only studied extensions for long leases with around 100 years plus remaining because that's all I needed to know.
I realise that for professional valuers things can get very complicated when there are only 40-50 years left on the lease because marriage value kicks in, tenants improvements can affect valuations, relativity kicks in, the reversion can be a considerable sum. Surprising in many of these cases the ground rent is quite low and only forms a very small part of the total premium.
In the case of long leases with doubling ground rents it's really all about the ground rent. And in spite of what you say these calculations are very, very easy. There might be minor discussions about the property value but the biggest problem for both valuers is not producing the figures but agreeing the capitalisation rate.You say to me having done 2 lease extension doesn't make me an expert which is true. However if you were going to climb a difficult mountain and had the opportunity to speak to someone who had just climbed it, surely you want to listen to their advice in spite of him not being a full-qualified mountaineer.
The reason I participated in this thread is that Marcus's situation was very similar to my last lease extension. I don't know how many doubling ground rent leases you have dealt with. But I thought as an amateur valuer going up against a professional valuer, to get rid of my doubling clause, to have my existing £500 ground rent (which had recently doubled from £250) reduced to £350 and having it replaced by a 10 RPI lease, and a 90 year lease extension all for a premium of £5,000 I thought I did quite well. Obviously not as well as you could have done Freda, because going up against a professional valuer with all you experience and expertise could have probably got the same result for me but several thousand pounds cheaper.
At least I have given Marcus some figures which in spite of your protestations are 100% accurate. I can't advise Marcus about getting a non-statutory lease, it all depends on how amenable or otherwise the landlord is. It might be worth while asking other residents of the block which valuers they have used and who have dealt with this landlord previously.

Pardon me for intruding on an unhappy ménage à trois.........., but, would SS17 mind providing comparable figures for income streams when Ground Rent doubles every 25 years, rather than 10?

Ground rent doubling every 25 years is not too bad, this equates to approximately 2.8% compound p.a. Long term this could work out cheaper than RPI linked unless you believe government can really stick to their 2% target. The government's 2% target is a bit vague - is this to be measured by CPI or RPI? As you know RPI tends to be about 1% higher than CPI. So there would be no point in moving from a 25 year doubler to a RPI linked lease. If you wanted to, you could move from a 25 year doubler to a Statutory lease extension with zero ground rent and it would not be too expensive. This would also give you 90 years more on your lease. I will need more details - total length of your lease - how many years have already gone - what is the current ground rent you are paying? Give me the value of your property and I can also work out the reversionary value for you.

The matter of mortgageability has been raised but the actual situation is significantly worse than alluded to.
I have recently done a valuation on a flat in Reading with aground rent which doubles avery 10 years. I had to return a zero value as it was not acceptable to a very prominent Buy to Let lender.
Many banks/building societies simply will not lend and others are moving in the same direction because of perceived problems if they ever have to re-possess and sell.
Some lenders will provide funds on a cash only basis but in my experience this will reduce the value signifcantly, perhaps by as much as 25%..
My suggestion is to try to negotiate with the freeholders to limit the increases to RPI or a similar benchmark which lenders are currently happy with.