Selling a flat buyers want deed of variation re ground rent

[Katy4321]

Hi,
I'd really appreciate thoughts and advice on this, especially if you have particular experience.

My DP is selling his flat and the money for that is to be used as a deposit for a house which we have had an offer accepted on (and is part of a chain).

DP has accepted an offer, nearly two months ago, on his flat at near asking price. Now the buyers have requested that he obtains a deed of variation with the freeholder to cap ground rent at 250 (the current amount and the flat is outside London ). The current terms of the ground rent are that it goes up every 10 years and the increase is determined by the retain price index (rpi). DP took out indemnity insurance when he last remortgaged, to protect the lender (in the unlikely circumstance the ground rent is not paid and the freeholder takes possession of the flat) .

From what we have read and understand this is not one of the 'bad' leasehold agreements that allows ground rent to double every 10 years. But the buyers solicitor appears to be insisting on the deed of variation, rather than the buyer getting indemnity insurance for their lender. They are concerned that the ground rent, at some point in the future will be more than 0.1% value of the property, and some lenders may not lend on a property in this case.

My DPs solicitor has said if he does apply for the deed of variation and the freeholder says no, then indemnity insurance can never be applied for again and the flat may be unsellable. (and possibly applying for a deed of variation with current indemnity may be problematic - that's not yet clear)

So naturally DP does not want to apply for a deed of variation. And it is looking more and more like the only option is to pull out and put flat back on the market, which he really doesn't want to do. This will screw up our purchase, break/delay chain and we have a baby on the way any day. So this is all really stressful.

What can we do, the buyer is only going to listen to their solicitor and DP has to listen to his. And to us at least it really seems that the current ground rent agreement is really quite normal and although some risk, not a major issue.

Any thoughts/advice on how we can solve this impasse?

We had a similar request from our buyers recently. Though ground rent doubles only every 25 years and at £100 with a property value of over £750k (London, large maisonette) our solicitor advised against and suggested the buyers discuss with the freeholder after purchase. Their lenders had no objection so it wasn’t an issue in the end though did cause anxiety at the time. I suspect it will come down to what the lenders want.

@Katy4321, I was also threatened with this "lender won't lend" when I sold my flat a few months. Mine was in London, so higher ground rent, no doubling clause, but wasn't capped at 0.1% of property value, which is what the buyer's solicitor was asking for. I asked for evidence that the lender would not lend, also have a look at the Mortgage Lenders Handbook (google CML Lender Handbook) as it outlines when GR is an issue, for various lenders. If you know your buyers lender (like I did), then that will also help fight your case. Unfortunately my Solicitor kept repeating the same thing "that we must apply for a DoV" but I decided to ask for proof of this, and did my research on it and fought my corner....and the issue was then removed from the Enquiries list. Unfortunately there are many flats with major GR issues and I think this has led Solicitors to be over-zealous and asking for DoV willy nilly. I also posted on here and got loads of responses from people telling me that a DoV was required, and this was a massive issue and I wouldn't be able to sell. It caused me so much worry an anxiety as when I googled GR, I realised the enormity of some people's situation.....which is why I wanted to respond to you to tell you all is not lost. Have a look at the CML Handbook and push back.

@Ealaigh and @areyouhavingagiraffe thank you for responding - good to know these things can work out and i will look up that hand book. As far as we are aware their lender doesn't have a problem with it as it is, but it is the theoretical risk that there may be lender issues at some point in the future that their solicitor has raised as an issue . And DP has his solicitor basically saying don't do the DoV and the buyers solicitor saying that it must be done.

I do feel I must be missing or not understanding something, as this really doesn't feel it is a big enough issue to make a the sale fall through. It doesn't seem a terrible ground rent issue.
And i don't really understand why it would be so terrible to approach the freeholder for a DoV and for them to say no or if they are likely to say no. And if they said yes to a cap of ground rent how much would that cost and how long would it take.

As I understand it, if your ground rent is over £250 outside of London there is a theoretical risk that if the ground rent is not paid your flat could be repossessed. Your husband has indemnity for that reason. Many lenders currently won’t lend to people in this situation. I am not clear on the reason that your solicitor has advised against applying for a DOV or alternatively a statutory lease extension with reduction of ground rent to a peppercorn. It would be sensible to ask both sides to clearly explain their position so you can make a decision. As I said in our case it was slightly different as the ground rent wouldn’t exceed £1000pa in the lifetime of the mortgage applied for.

@Katy4321, here is the link which outlines all Lenders requirements on GR. You can see there are Lenders which will accept GR up to 0.2% of property value. Also, in many case the 0.1% refers to the start of the lease! You can also see many Lenders accept Indemnity to resolve the AST issue (where GR exceeds £250, or £1000 in London).
If you can, I would speak to your Buyer, that's what I did. I knew his Lender, and looked up requirements and fought my corner.

lendershandbook.ukfinance.org.uk/lenders-handbook/englandandwales/question-list/1852/

If you end up binning your existing buyers, chances are another buyer will have the same issue raised by their solicitor.

Solicitors have been sued over not highlighting this risk, so are very keen to do everything to address it.

Slow moving legislation is going through Parliament over ground rents. Anything with a ground rent over 0.1% or which rises above £250 outside London is a problem. Solicitors point out that even if mortgage lenders CURRENTLY lend on your ground rent terms, there is no guarantee they will CONTINUE a to do so and lending terms are getting stricter all the time. For this reason, they will advise against buying without a deed of variation.

So, look at it from a buyers viewpoint. It’s not just if they can get a mortgage now. It’s also about if they can sell the property easily when it comes to the time they want to. This is where the problem lies and why solicitors talk about properties being unsellable.

A solution is to ask for a deed of variation and if you don’t get one, to go for a statutory lease extension, assuming you’ve been there 2 years. This will cost but will extend lease by 90 years and make ground rent zero. It takes some time and sometimes sellers start the process and can then legally pass it to the new owners to complete. You’d expect to be paying for this as the seller,,given people won’t buy without it.

It’s a pain and it can delay selling. Ideally you’d sort this out before selling, so get into it 6 months in advance.

All of this isn’t what you want to hear. You’ve got a buyer and you want the sale to go through speedily and at no further cost to yourself. You hope the mortgage lender will say it’s fine and the buyer will be satisfied by that. However, the reality is unlikely to be this. You are likely to have to spend time and money getting this sorted out and it isn’t just a solicitor being fussy. A cash buyer who doesn’t need a mortgage might be prepared to take this on without the lease extension, but they know they’ll need to sell one day too.

Re Deed if Variation, freeholders won’t normally just give them feee of charge. The ground rent provides them with a steady income and is a key asset. That why you pay to expect the lease and buy out ground rent. So I’d expect this is an issue that won’t just go away.

@wombatchocolate thank you for your comments. It is good to get more of an understanding of where the buyers solicitor is coming from with this.
I can see the DoV is the ideal option for the buyer, if they have plenty of time, but to me the indemnity insurance seems like an easy fix to the problem, as it protects the lender and i can't see why that solution would be a problem for future lenders. It is what DP solicitors have suggested is an ok option, and what his previous solicitor did a couple of years ago when he remortgaged.

Personally I would be inclined to go for the DoV and hope to get in place resonably quickly, but DP's solicitor has warned if this gets rejected by the freeholder, then it is not possible to get indemnity insurance going forward and the place could become unsellable. So naturally we are really alarmed about this option - and trying to get more clarity on why it would be such a problem. Also DP's solicitor have said the current indemnity insurance may make it problematic to apply for a DoV-again we don't have a good understanding of why this is.
We really need to understand these concerns of DP's solicitor, before we can get anywhere... They are a experienced solicitor with a good reputation.

Join National Leasehold Campaign on Facebook and ask there.
They really know their stuff and will advise.

The indemnity insurance purely protects against the risk of the property being repossessed by freeholder if you don’t pay your ground rent that exceeds £250. Above £250 it becomes an AST and non rental payment can result in forfeiture/re possession. In reality, this happens incredibly rarely but mortgage lenders want protection from their asset being reclaimed.

This indemnity does nothing to deal with onerous ground rents exceeding lending criteria of 0.1%.

Therefore, an indemnity alone is unlikely to solve your problem anyway. The problem is if ground rent exceeds 0.1% or property value or will do or might do at some point over the lease length.

Really, the only longer term solution is the deed of variation or a lease extension. No-one wants to hear this as it’s costly and time consuming…but it’s the reality. Many people get onto this several months before marketing the property. Then the property is attractive to buyers as all the isssues are removed. Those buying often pullout when the issues become clear and the timescales/complications. They can see that even if they are not phased by it, the people they sell to in a few years may well be.

@Katy4321, don't join the National Leasehold Campaign on FB, I did that and it made me even more worried. Your solicitor is fighting your corner (unlike mine) so go with their advice. I argued against mine, and still sold without a DoV.

@wombatchocolate Maybe I'm missing but a ground rent of 250 going up by RPI, once every 10 years does not seem hugely onerous or alarming (and leaseholds are generally priced to reflect the extra costs) . And if the indemnity insurance protects the lender and lenders are comfortable with it now why would they not be in the future. Who is really at risk? (obviously the leaseholder if they don't pay their ground rent, but everyone appears to think that is so unlikely), so i don't really understand why indemnity insurance is not a resonable solution. Are lenders going to stop lending if ground rent goes for example to 350 a year and that takes it over the very small 0.1% limit - aren't they going to be fine as long as the person can afford their mortgage (and puts in indemnity insurance to protect lender in the very unlikely case freeholder reclaims the property)
Is it a bit more of a case of people being told to worry about these things, rather than being an actual problem (due there being some actually problematic ground rent scandals).
And the buyer can also apply for a dov themselves at a later date and gain presumably gain some of what they pay in increasing the value of the property.

Mortgage lenders are turning down mortgage applications for properties where the ground rent exceeds 0.1% or is above £250.

It isn't just about now. Everyone who buys will also need to sell. It is the solicitors duty to point out that a property has ground rent conditions that will or coukd make it unsellable in future. The vast majority of people take note of that...because they want to sell and know the people they sell to will also need to know they can sell I future.

Have you googled the issue and seen how many people have unsellable properties because they have ground rents which were not considered onerous when they bought them, or you might not consider onerous, but which the mortgage market sees as a risk. Have you looked at the Mortgage Lenders book linked to upthread that showed you all the mortgage conditions lenders apply and just how many have 0.1% as a condition?

Already, you are actually facing an issue with this, in terms of selling. So why it's hard for you to believe it's an issue is hard to understand really.

It's up to you....you can keep pressing ahead and hoping someone is just going to buy the flat with the issues remaining. You can lose this buyer over the issue and get another buyer. You can then find their solicitor is duty bound to point out exactly the same issues to the new buyer. People lose multiple buyers over these issues. After all.....would you honestly buy a property with these conditions if your solicitor pointed out to you that a future buyer might well be unable to get a mortgage on it?

On one level you're right.....it's a perception thing, rather than an issue of whether all ground rents over 0.1 are terrible. Lots might be just over that and increase at what would have been considered sensible amounts in the past. But the point is that 0.1% has become the benchmark figure rightly or wrongly. It doesn't actually matter if it is a genuine problem, but the fact it is perceived as one leads to lenders being wary and turning mortgage offers down and solicitors needing to warn their clients and advise strongly against buying such properties. So it's a self fulfilling prophecy if you like...but it's the one that's been fulfilled at the moment and you're living with whether you like it or not.

Again, the indemnity purely indemnified the lender against financial loss if the property is repossessed due to you not paying a ground rent which exceeds £250. It does not deal with the issue of the ground rent exceeding 0.1% which can make it U mortgageable and therefore unsellable to anyone who needs a mortgage, and only sellable to a cash buyer who knowing the situation will expect a SIGNIFICANT reduction to compensate and because they Inwo the strength of their position.

Best wishes with resolving the issue. Much if it is coming to terms with the reality of it. It takes a while for some people,mespeciallybearlespecially they bought the property a while ago,now hen these issues didn't really exist. Things have changed a lot and rapidly.

Yes, a future buyer could apply for a lease extension, which will take ground rent to zero as well as giving an extra 90 years on lease. This costs many thousand pounds and currently can be a long drawn out and uncertain cost process. No wonder buyers don't want to buy somewhere with that hanging over it. If they do,ntheybwill expect financial compensation in the price they pay for the property for the cost of doing it and the the significant inconvenience, and fact they can't do it until they've owned for 2 years. Given lots then find they cannot afford it or don't get round to it, solicitors are still duty bound to recommend against this.

As a seller, the best chance you can give yourself to both sell and sell at a good price are to do the lease extension upfront before marketing. Otherwise you might be lucky and sell at a low orice or unlucky and find no-one wants it at all.

You can try it and see. I think you already are and are finding the reality, even though it doesn't seem reasonable to you. It is the reality at the moment. Your flat can be brilliant. The ground rent could be affordable to the new owner. The mortgage lender might not be at risk of the property being repossessed due to AST because of an indemnity. But a ground rent if £350 now or sometime in nearish future can make it unmortgaggeable and its that which makes it a major problem.

Not sure if you'll see this but what was the outcome?

@Katy4321

I'd be interested to know too. Apparently property with RPI linked ground rent increases have started to become more of an issue for some lenders. You can see why I guess when it got to 14% at one point and is still way way too high.

Hi,
In the end we got a deed of variation that fixed the ground rent at 300 per year forever, and changed it so that if someone defaults on the ground rent, the freeholders can't claim the whole place (can't remember the exact wording).

Cost about 1.5k in solicitors and valuation fees, that the Freeholder used. And 2.5 K for the deed of variation. This was all split 50:50 between us and the buyer. The buyer was a bit of a nightmare, offering to pay all and then changing their mind at several points.

So did cause expensive delays for all of us (buyer was paying rent), and very little benefit. But we all got our new homes in the end.

I'm not sure but think things have changed since then and there is more protection for leaseholders.

Sorry I forgot this was about selling dp's flat and not mine. The above response about selling my leasehold place with ground rent of 300, which would go up every 25 years based of the price of the property. We sold my place a few months after selling DPs. That did go the deed of variation route.

With DPs place our solicitor held fast and they accepted the indemnity insurance (which I think DP already had) and no DOV was needed.

Hi! @Katy4321 currently going through this. Can I ask how long it took for you to sort DOV please? And was the freeholder a large company/helpful in the process at all?

thanks in advance