Ground Rent in lease - query

[areyouhavingagiraffe]

Hi all,
I have a query regarding ground rents. I have a HA flat which I am selling. I have a query back from the buyers solicitors about the ground rent, which I have posted below:

The ground rent increases are such that our clients lender may not lend, and even if they do our client should be advised not to proceed. We require a deed of variation to preferably a level rent, or which limits the rent to 0.1% of the property value, limits increases to no more than inflation, and with reviews no more frequently than 5 yearly. Please ask the landlord for a variation.

However, my ground rent increases by £200, every 20-30 years. Therefore Yr 1-19, it is £150/ yr, Yrs, 20-39 £300, Yrs 40 - 59 £500, Yrs 60-99 £700 and by Yrs 99-125 it is £900/ yr. I am currently in Yr 16 of the lease, and £150 is defo less than 0.1% of property value. Also the lease clearly states when it is reviewed (every 20-30yrs) and it never exceeds £1000 per year. There is no "doubling rents clause" every 10 years etc. I have explained this to my solicitor and pointed to the extracts in the lease, and he says we still need to ask the freeholder for a Deed of Variation. I am in the process of contacting my Leasehold officer at the HA, but I feel that the lease is very clear cut and I don't understand why we need this, and also what if the HA refuse to enter into a Deed of Variation. Can anyone help explain this to me? (Please)

We require a deed of variation to preferably a level rent, or which limits the rent to 0.1% of the property value
They probably think that they are pushing at an open door. Have a read of this.

Your property has what are known as onerous ground rent terms.

Mortgage lenders generally won’t lend now on properties with leasehold terms that you mention.

This makes many people, prisoners as they cannot sell. You can ask for a deed of variation, but it is unlikely to be given free of charge. The other way to alter the terms of the less is to go for a statutory lease extension which gives a further 90 years on the term and makes ground rent zero. The cost of this varies depending on how long the lead has to run (will cost a lot more if 80 years or less) and also costs more with the exscalating ground rents you mention. There are substantial legal costs to pay too which also mean paying the freeholders costs. You are talking about multiple thousands of pounds to do this.

Changes to leasehold law are on their way but might not be there to benefit existing leaseholders for several years.

You can try to ask for a deed of variation. It might be given if you mention and perhaps link to the legislation which is on the way and ask them to consider changing the lease to make the ground rent never exceed 0.1% of value in light of the law change coming. But in all liklihood they will say no and you will then either need to drop the price to relflect the cost to the new opener if extending the lease or do it yourself. You can try to sell to a cash buyer who won’t need. A mortgage but they will expect a lower price to reflect the issues with the lease.

It is unfortunate but your lease terms significantly devalue your property.

Incidentally, I bought a leasehold flat about 18 months ago with onerous ground rent terms. It had a long lease (over 110 years) and ground rent which increases each 25 years from £150 to £200, £250, £300.

I was a cash buyer and prepared to buy with the terms because the lease is long and I know the law change is coming and I will be able to then pay to get rid of the onerous terms at less cost than it will take now. In order to get my sale, the seller had to drop the price by £10k. I don’t expect the lease extension Inwill get once the leasehold law changes are fully in effect, to cost that much, but I’d still expect to pay £5k once legal costs are considered. As my property didn’t have doubling ground rents and didn’t have ground rent above 0.1 at the time I brought, some lenders would have lent but lots wouldn’t have. The seller needed a cash buyer like me, but the price if that was to need to lower price.

Sorry...isn’t an encouraging story for you. It will be a case if waiting possibly several years, or in all liklihood paying to get a statutory lease extension to sort this out now.

Thanks @senua. I see that there are provisions for capping the ground rent at 0.1%, what do they mean by leasehold retirement properties? Does this mean that the legislation is going to come into force? Also I have been reading about the risks associated with the ground rent being more than £1000 per year, but my lease clearly sets out my ground rent is below this...
I have agreed for my solictors to contact my HA, but I am now wondering what happens if they say no....

Thanks @WombatChocolate. I live in a development of over 300 flats and so many have sold, so I don't understand why I have hit a stumbling block. Also I note from the CMI Lenders Handbook, that Lenders only need to be informed where the ground rent is over £1,000 per year in London. Mine is not, and will never be.

Had not realised you were in London.

You should return to your solicitor and ask exactly which terms are unacceptable bearing in mind you are in London. Ask who the lender of your buyer is and check their terms on CML handbook.

The legislation will take a while to appear. When it comes in, there will still be costs involved in changing the lease in existing properties but the price should be more transparent and cheaper than currently... it still likely to be several thousand pounds. Any lease extension after the keg should give 990 years on lease and zero ground rent. The freeholders will need to be compensated financially for their loss of ground rent, but they will get less than currently .....that’s my understanding anyway.

I was prepared to buy a low priced flat with such terms because I llet it out and won’t be needing to sell for a good 10-20 years by which time this change to law will have happened and I have the cash for t he reduced price to any for the lease extension. I don’t expect to try and well it with the current lease terms.

Will the ground rent terms on yours take the ground rent over 0.1% of flat value or could it? It is likely to be that which is the stumbling block. Many have pointed out that ground rents have often exceeded 0.1% in the past with no problem when not doubling etc, yet the problem is that mortgage lenders won’t accept them now, so regardless of whether it’s a reasonable objection or not, if mortgage lenders won’t lend on it, these terms can ended property unsellable.

Lender terms vary significantly. You need to know the exact lender of your buyer and their lending terms?

Thanks @WombatChocolate, my buyers Lender is Natwest. I have checked the CMI Lender Handbook. It states:

We have no objection to a lease which contains provision for a periodic increase of the ground rent provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable. If you consider any increase in the ground rent may materially affect the value of the property, you must report this to us

The flat is valued at £280K, ground rent is currently £150, rising to £300 in 4 years, which will then be the ground rent for 20 years....

I have no issues with paying for a Deed of Variation but I am just not certain whether the Housing Assoc will enter into one, they could of course say no? I just cant see why it is needed. I have asked my solicitors who keeps saying "the buyers solicitors has seen the lease"....

Assuming limited price rises , the ground rent will exceed 0.1% in 4 years.

People are jittery about leases and ground rent. Solicitors don’t want to be sued later and err on side of caution.

Basically people want to buy properties with either a very low and fixed ground rent or zero. The increasing types likes yours aren’t popular now and seen as a risk to further buyers in terms of getting mortgages, even if a current buyer can get one. That’s also why they are advised against.

Natwest also state:
N.B. if the ground rent exceeds £250 per annum (£1000 per annum for London properties) you must confirm that the terms of the lease in relation to the ground rent are acceptable. We can then approach the valuer to confirm whether the cost of the ground rent would affect property suitability and marketability.

So, it never exceeds £1,000. Ever. Not even at Year 125.

But it will be exceeding the 0.1% when it increases in 4 years. It is that which may be deemed as unreasonable.

It will. But Natwest don't stipulate that as an issue. They say if the ground rent exceeds £1,000....however it does not.

But that comes under the first bit that as long as it is reasonable, the £1000 limit is a separate issue

Note that solicitors also tell clients that mortgage lenders could become stricter about ground rent terms in future. They don’t just advise against if the buyer cannot get a mortgage now, but also if there is a risk that when they come to sell, furtive buyers might struggle to get a mortgage or sell.

Lots of people have flats with ground rent terms which were acceptable when they bought them. Due to the doubling ground rent scandal, mortgage lenders have responded by being more cautious than is probably needed and flats that had leases seen as fine, are often no longer seen as fine.

You can return to the solicitor and ask exactly what is considered onerous if 0.1% isn’t stipulated....but the generals term ‘anything onerous’ will include that and solicitors are on the look out for anything exceeding 0.1% as so many lenders DO stipulate that now...so it has essentially become universal. Mortgage lenders have become very fussy and so solicitors have to be very fussy.

When you bought it and when you think about the ground rent you’re not phased. However, the market has changed and the fact the law is changing to mean new builds won’t have these onerous ground rent terms, makes those that remain with them will become more difficult to sell and relatively unattractive. Sadly, this is probably going to cost you in some form...either a lower price or via a statutory lease extension. Be wary of a deed of variation or informal lease extension (might be offered cheaper) as these often still impose ground rents.

The trouble with thinking you can just lower the selling price, is that often people do t realise the lower selling price is to reflect to lease issues. When they get further in the buying process and the lease issue is spelled out to them, they either want to pull out or have more money off or ask you to arrange lease extension....so you end up doing it anyway.

Selling a property that’s gas already had the lease sorted out is by far the easiest as lots of buyers are freaked by the issues or daunted by sorting it themselves even if they don’t need a mortgage....but most do need a mortgage and simply won’t get one with onerous terms.

It’s the 0.1% thing regardless of whether it’s named by the specific lender or not.