Keep or sell leasehold with ground rent increasing formula?

Keep or sell leasehold with ground rent increasing formula?

9:19 AM, 5th April 2021, About 6 months ago 17

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I have a leasehold of a flat with Ground Rent of £250 that increases by either £250 or the rate of inflation every 10 years. 10 years are up next year, so Ground Rent will be a minimum of £500. Then the following 10 years will go up a minimum of £250 and so on.

I wasn’t planning to sell the flat as the Net Yield is 9% and the flat easily gets rented. Basically, it will be our Pension.

At the back of my mind is if my kids or their grandkids want to sell the property it will be impossible to do so due to the increasing Ground Rent clause in the lease.

I have tried to get the other three leaseholders to buy the freehold with me but not I am getting anywhere. I think it’s cheaper to buy now than when the Ground Rent increases to £500 per year

Any advice or inputs would be much appreciated.

Jim



Comments

by Parvez Hemnani

10:09 AM, 5th April 2021, About 6 months ago

Hi Jim,
I have a similar issue and discussed with my only son. His view was that as it’s income producing for pension we will keep and when I am gone he will make a decision whether to keep it or sell it. Net net he will get something even if he has to sell at lower price so why worry now.

Also I believe there is leasehold reforms coming which may work in our favour. Everyone’s circumstances are different so good luck whatever you decide.
Regards
Parvez

by Dylan Morris

10:12 AM, 5th April 2021, About 6 months ago

You’re unlikely to sell to somebody who needs a mortgage as I doubt any lender would be interested. So your only option is to find a cash buyer where your sale price will be much lower. At 9% yield why not just keep. It’s funding your retirement which was your intention and when you pop your clogs your kids will just have to sell for whatever they can get. (Presumably you knew about the ground rent before you purchased ? )

by Laura Delow

10:14 AM, 5th April 2021, About 6 months ago

If the property gives you such a good yield it may be an idea to hold on to it for the time being in light of proposed Leasehold Reform. It is proposed that an online calculator with a prescribed formula will set the price you need to pay to extend your lease with zero ground rent or buy the freehold. The reforms are intended to cap ground rent to 0.1% of the freehold value for the purposes of calculating the premium to be set by Government. Currently these rates are determined by valuation surveyors, and are often the subject of extensive argument in the First tier Tribunal (Property Chamber).
It was announced on 7th Jan 21 that Legislation will be brought forward in the upcoming session of Parliament to set future ground rents to zero, this being the first part of seminal two-part reforming legislation planned in this Parliament (i.e. by May 2024). Government will bring forward a response to the remaining Law Commission recommendations in due course.

by Ian Cognito

11:29 AM, 5th April 2021, About 6 months ago

If the leasehold reforms are introduced, then "happy days". However, even in their absense, your position is not as bad as it might at first seem.

Whilst a £250 increase after 10 years is a doublng at the first review (i.e. an increase from £250 to £500), the proportional increase thereafter is reduced at each review. In percentage terms, the increases are:
10 years = 100% = 7.18% compound
20 years = 50% = 4.14% compound
30 years = 33.3% = 2.92% compound
40 years = 25% = 2.26% compound
50 years = 20% = 1.84% compound

Not that it materially changes things, but:
1) How is the inflationary increase calculated?
2) How long is the lease?
3) To give a sense of perspective, approx how much is the annual service charge?

by Jim

11:36 AM, 5th April 2021, About 6 months ago

Reply to the comment left by Parvez Hemnani at 05/04/2021 - 10:09
Thank you for your reply. Yes I am probably overthinking. The Yield is great and hope the flat stays in generations for ever.

by Jim

11:40 AM, 5th April 2021, About 6 months ago

Reply to the comment left by Dylan Morris at 05/04/2021 - 10:12
It will become unsaleable in future but may not be a factor. We did know about the Ground Rent when we brought the flat and the solicitor had told us not to buy it ! but we went ahead as it was a nice flat in tiptop condition and the yield was excellent

by Jim

11:42 AM, 5th April 2021, About 6 months ago

Reply to the comment left by Laura Delow at 05/04/2021 - 10:14
I understand the reforms only affect leases going forward and those that need to renew the lease so may not help ? Our lease has 990 years left.

by Jim

11:46 AM, 5th April 2021, About 6 months ago

Reply to the comment left by Ian Cognito at 05/04/2021 - 11:29
Hi Ian

Below is the calculation:

Revised Rent = £250 * Latest Index Figure/Initial Index Figure OR the sum of the yearly rent payable immediately before the relevant review and £250 whichever is greater

990 years left. No Service charge.

by Graham Bowcock

11:59 AM, 5th April 2021, About 6 months ago

With my valuer's hat on here I think that it's perfectly straightforward to assess value and to obtain a mortgage. The fact that the ground rent increases is not initself a bar to a mortgage.

The value of all leases is (technially) depreciating, but most are so long that it's not noticable (especially when values generally are increasing). Where the rent is set to increase then this has a greater effect on value, but it's easy enough to calculate.

The problem that I see is that many lenders/valuers have not (hisorically) properly considered the lease terms, so buyers have, effectively, overpaid. Now that everyone is aware of the issue there will be a correction.

by Ron H-W

12:02 PM, 5th April 2021, About 6 months ago

(This was put together before I saw any of the responses & additional info.)

At least it's not the TERRIBLE scenario of the ground rent DOUBLING every 10 years - but please confirm!!!!!
So you are 9 years into a lease - of how long? (The longer the unextended lease, the more is the current value of the not-yet-collected ground rent, but the less is the current value of the eventual surrender of the flat.)
Suppose the original lease is 99 years, then we'd have remaining:
99-9 = 90 years at £2500, LESS the sum of all of these:
81 years at £2250, 71 years at £2000, 61 years at £1750, 51 years at £1500,
41 years at £1250, 31 years at £1000, 21 years at £750, 11 years at £500, and 1 year at £250.
The lease calculators I've looked at seem to use a deferral/discount rate of "6% to 7%".
If we use a 7% rate, then the uncollected rent is now worth £9951 if there are 90 years remaining, or £10008 if there are 190 years remaining.
And delaying until next year will cost an extra £480 or £485 respectively.
If we use a 6% rate, then the uncollected rent is now worth £12474 if there are 90 years remaining, or £12655 if there are 190 years remaining.
And delaying until next year will cost an extra £530 or £542 respectively, which isn't drastic.

Update: Add about £1 or so, if the original term is 999 years not 199 years.
Disclaimer: I guess you'd better have somebody re-check my maths, "just in case".

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