Ground rent school boy error?

Ground rent school boy error?

13:27 PM, 29th March 2018, About 5 years ago 89

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Hi All, Ive made a bit of a school boy error here.

I have a small portfolio, and my last purchase around 4 years ago was a flat in South London had the following clause for the ground rent: Ground Rent £250 Reviewed every 10 years by a factor of 2 or by RPI whichever the greater. Term 99 years

At the time my solicitor did clearly point this out, however I decided due to the price and location I would still make the purchase. I must admit I look back now and do have some regret and am wondering what I should do as its beginning to concern me.

Please don’t answer with “well you should not have purchased” as I’m already down the line with this”; any thoughts/advice from experienced landlords would be greatly appreciated.

Thank you

Marcus



Comments

Dennis Forrest View Profile

10:09 AM, 8th April 2018, About 5 years ago

That's very interesting. I knew some lenders like Nationwide would not give residential mortgages on properties with 10 year doubling ground rents. The fact that some BTL mortgages are affected as well in spite of buyers having to put down at least a 25% deposit shows the seriousness of the situation. I agree the best strategy is to negotiate with the freeholder for a RPI linked lease or similar. IMO now is a very good time. There is uncertaintity over the doubling ground rent situation and whether any government action will follow. Some freeholders are now prepared to cut a reasonable deal.

Ian Cognito

10:12 AM, 8th April 2018, About 5 years ago

Reply to the comment left by at 07/04/2018 - 19:04
Yes, SS17, I feel that the 2.81% compound is OK. Without an additional "or RPI, whichever is higher" clause, at least I've got some chance of a below-inflation increase!

The details are:
Total length of lease - 125 years from 25/06/16
Ground rent - £200 per annum
Rent increase - double every 25 years
Current value of property - £353,000

Many thanks...............I await your figures, with interest!

Dennis Forrest View Profile

12:19 PM, 8th April 2018, About 5 years ago

Ian Cognito
Bear in mind that you must have owned the property for a minimum of 2 years on the date that your solicitor serves the Section 42 notice on the freeholder for a Statutory Lease extension. This date is the Valuation Date and all future discussions and calculations are based on this date. My solicitor advised me, to be on the safe side, to wait 2 years after the date shown on the Official Copy of Register of Title. This date can be 6 or 7 weeks after your purchase date. After extending you lease you will have a 215 year lease ending in the year 2231.
So I am going to assume that you serve your S42 notice on 25 September 2018.
Note that fractions of a year are always expressed as decimals and if you are really nitpicking you count the number of days and divide by 365.
So you will then have a 125 year lease with 2.25 years gone and 122.75 years remaining. There will be no marriage value, there will just be firstly the landlord’s reversion and secondly compensation to the landlord for loss of ground rent.
The income streams are as follows:
£200 p.a. for the first 22.75 years
£400 p.a. for the next 25 years but delayed by 22.75 years
£800 p.a. for the next 25 years but delayed by 47.75 years
£1600 p.a. for the next 25 years but delayed by 72.75 years
£3200 p.a. for the last 25 years but delayed by 97.75 years
I have worked out the figures for the largest part of the premium – the ground rents.
So at 5% the premium works out at £6,668
So at 6% the premium works out at £4.872
So at 7% the premium works out at £3,799
So at 8% the premium works out at £3,105
So at 9% the premium works out at £2,627
I have promised to help my wife with some shopping so will post again later today with the value of the reversion but I expect it to come out and well under £1,000.
If you or any other reader, especially Freda, wants the formula for this spreadsheet then here it is:
1st stream
=PV(rate%,22.75,200)*-1
2nd stream
=PV(rate%,25,400)/POWER(1+rate%,22.75)*-1
3rd stream
=PV(rate%,25,800)/POWER(1+rate%,47.75)*-1
4th stream
=PV(rate%,25,1600)/POWER(1+rate%,72.75)*-1
5th stream
=PV(rate%,25,3200)/POWER(1+rate%,97.75)*-1
Those forum members who are used to spreadsheets will realise that instead of typing in 5% or 6% etc you just set up column headings in say cells B4,C4,D4, E4 and F4 and insert in these cells 5%,6%,7%,8% and 9%. You then only have to make entries in your B column and you can drag your formula across the other columns.

Dennis Forrest View Profile

14:49 PM, 8th April 2018, About 5 years ago

Ian Cognito
Here is the other part of the valuation dealing with the landlords’s reversion using 5% deferment rate which seems to be the standard now for flats.
Assuming a property value of £353,000 and 122.75 years remaining on the existing lease the reversion works out at £884.68
Formula used is =353000/POWER(1.05,122.75)
Deducting the small value after 212.75 years is £10.96
Formula used is =353000/POWER(1.05,212.75)
So the net amount of the reversion is only £873.73
So in total you are looking at say £5,000 in fees + say £5,000 for the lease premium bit + £874 for the reversion. Even if you got the fees down a bit you still wouldn’t get much change out of £10,000.
Is it worth spending that kind of money? Your ground rent terms aren’t too bad; might even work out a bit cheaper than RPI linked and offer future buyers certainty. If you sold say in 15 year time buyers would know ground rent would be £400 about 8 years later and no worrying what RPI is going to do. This would probably be the only increase the next buyers would face.
Would it increase the value of your property. IMO in the short term very little difference. I doubt that a buyer would pay more than a couple of thousand more just to save £200 a year. Longer term say in about 30 years time when your remaining term is down in the 90’s then yes. You extended lease with zero ground rent would still have over 180 years to go.
The other thing to consider is what else could you do with £10,000 investment wise. You could put £10,000 into a self select ISA and buy a boring utility share like National Grid which is currently pays a yield of 5.5%. This is £550 a year tax free income – more than enough to pay the ground rent. National Grid also aims to increase the dividends each year in line with inflation. What you don’t get with shares of course is security of capital; the share price can rise and it can fall, but long term most share prices rise. What most people forget is that while share prices go up and down many dividends continue to rise so that your income is secure.
What might possibly be a very cheap option for you, especially if you plan to keep the property long term is to see if your freeholder will just increase the term for you without removing the 25 year doubling ground rent. You could perhaps increase the lease by 75 years so you end up with a 200 year lease. At 2.81% increases the ground rent will always be affordable and you will have no worries about the lease term running down if you hold the property long term.
It goes without saying that I am not a professional valuer although I am certain my figures are correct. You need to think over first what you want to do and then discuss the options with your own valuer. I am not really sure how you choose a good valuer. They can all do the maths but I don’t think any of them have passed any exams or got any qualifications in negotiating skills. You need one who will get a good deal for you. They get paid the same fee whether they get a really good deal for you or just a very average deal. It’s a bit like estate agents, at 2% commission it make little difference to them whether they get £350k for your property or £330k.

Ian Cognito

14:44 PM, 9th April 2018, About 5 years ago

Reply to the comment left by at 08/04/2018 - 14:49
Many thanks SS17. I've used the formulae to build my own spreadsheet and input values for another property:

Ground rent - £400 per annum
Current value of property - £420,000
All other variables the same.

I've come up with:

5% premium = £9,350
6% premium = £7,139
7% premium = £6,043
8% premium = £5,171
9% premium = £4,537

and a Net Reversion of £1,039.56

If you don't agree with my figures, I'll recheck my spreadsheet for errors!

With regard to this particular property purchased last year, I'm a bit miffed that within less than a month of the final flat selling, the developer sold the freehold without previously notifying the 13 owners.

I also have suspicions about the managing agent's relationship with the new freeholder.

Maybe, rather than seeking to extend the lease and zero the ground rent, I should contact other owners to suggest buying the freehold?

BTW, thanks also for your observations concerning the wisdom of spending £10,000 rather than investing the money elsewhere.

Dennis Forrest View Profile

15:30 PM, 9th April 2018, About 5 years ago

Hi Ian
Your figure for the reversion is spot on at £1039.56. I disagree with you figues to the ground rent part. I've done it in a rush as just going away for a few days, but assuming the same time delays for each stream and assuming the streams are now £400, £800, £1600, £3200 and £6400 I get the figures to be 5% £13,336, 6% £9743, 7% £7597, 8% £6211 and 9% £5255.
Unfortunately the developers often sell on the freehold without even telling the owners or giving them the chance to buy.
As regards buying the freehold this is referred to as enfranchisement. I have not studied this in great detail but I will tell you what I know.
The premium to buy the freehold is not very much more than that a statutory lease extension.
I think you need at least 50% of the owners in the block to participate. Others can come in at a later date if they want to. Often those applying form their own company and give participants a 999 year lease at zero ground rent. As regards management you can get a company of your own choosing to manage the block or you can self manage.
There is a big saving in fees because compared to to a single application for just one Statutory lease extension you still only need one solicitor and one valuer, and still only one set of Freeholders fees for the whole group of you. So if say they are 10 of you applying it might only cost you say £1,000 each in total fees.
Please check all this information to make sure is's correct
Look at the LEASE website and search for enfranchisement. LEASE have a free telephone advice line where you can phone up for a free 15 minute chat with an expert. But you have to book a time to phone as it is very popular.
There is another website which is very good which runs as a charity to represent leaseholders. Leasehold Knowledge Partnership.

Ian Cognito

15:58 PM, 9th April 2018, About 5 years ago

Reply to the comment left by at 09/04/2018 - 15:30
Thanks SS17. Just had a quick look and my figures for 2nd to 5th stream are rubbish! I'll redo and, I dare say, get same results as you.

Anyway, there's plenty for me to research and think about.

Your 'advice' is much appreciated.

Ian Cognito

16:26 PM, 9th April 2018, About 5 years ago

Reply to the comment left by Ian Cognito at 09/04/2018 - 15:58
Spreadsheet amended. Our figures agree!

Edwin Cowper

13:38 PM, 16th April 2018, About 4 years ago

You have been advised of the legal way of proceeding. However, why buy an extension unless you've got a short lease?
Why not approach your landlord direct, and say "I will pay x to you now and you reduce my rent to £25 pa for ever".

Most of us are in it for the money.

The worst the Landlord can say is No.

If you get a deal is do very brief standard deed of variation.

I've no idea whether there are any tax implications from your point of view.

On reflection, there may be a simpler legal way of doing agreement - you need advice on this - a deed / doc saying he and his successors won't enforce any rent (its called the High Trees Case - equitable promissory estoppel)

Regards

Rizzo

23:00 PM, 23rd April 2018, About 4 years ago

Dear silversurfer2017
Would you be so kind to calculate the figures for me for a lease extension (Im not very good with Excel). I have a lease with a term of 125 years granted on 01/01/2006. The ground rent doubles every ten years, it started at £75pa and is currently £150 per annum. The property is valued at £70k. I appreciate your help and knowledge on this matter.

Best regards

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