Over the last few years a national scandal has broken about doubling ground rents of leasehold properties.
This is often where the ground rent doubles every 10 years over a 50-year period.
For example, a lease with ground rent starting at £250 in 2015 would double to £500 in 2025 and again to £1,000 in 2035. It would end up being a whopping £4,000 per year by 2065!
As a result, affected properties are almost impossible to mortgage and to sell.
In early 2019, the Government announced that 45 builders and institutional freeholders had signed up to a pledge to improve the situation for leaseholders.
The pledge involves changing ground rents so rather than doubling every ten years like above, they would instead increase them at the same rate as the Retail Price Index (RPI). They would not charge to do this.
The Retail Price Index tracks the price of goods and services – in very simple terms if the price of a Mars Bar goes up from £1.00 to £1.50 between 2020 and 2030, the RPI increase during that time will be 50%. That’s what your ground rent would increase by as well.
How would the change happen?
- your solicitor and the freeholder’s solicitor would do some paperwork called a ‘Deed of Variation’
- some developers or freeholders will also contribute to your cost of this legal work
What are the benefits?
The main benefit is simple: the ground rent on your flat is likely to increase less quickly than it would have done otherwise. Using historical figures you can predict that in case of the flat described above with a starting ground rent of £250, the future ground rent would be closer to £1,200 rather than £4,000 in 2065.
What are the disadvantages?
It might be worse in the short run
RPI has been quite low since 1980, but it is possible that it could go up. This has to potential to put you in a worse position than if it was doubling.
It’s worse in the long run
The change tends to mean that the ground rent increases by RPI every ten years for the duration of the lease – not just for the first 50 years!
It might make it more expensive to extend your lease or buy your freehold in the future
It’s possible (we think likely) that a future court-case could actually make it more expensive for people with RPI-linked ground rent to extend their leases or buy freeholds of flats.
This would be because a freeholder will look ahead to the distant future, when the ground rent would have continued to rise, and base their valuation on the future value.
You can’t sue your developer
Quite reasonably, a lot of people who bought leasehold properties with doubling ground rents feel like they were mis-sold. If you accept a conversion from doubling to RPI, you usually sign away your ability to seek compensation from your developer in the future
Should I take up the offer?
If you are ready to buy your freehold or extend your lease then converting to RPI first might make good sense. Currently, it will be cheaper to do that if you have a RPI-linked ground rent than one that doubles every 10 years.
Otherwise, it very much depends on your situation. If you do choose to do it you must do it with proper consideration.
Is there an alternative?
The alternative is to a Statutory Lease Extension, which in addition to extending your lease by 90 years, also reduces your ground rent to a peppercorn - which is £0.
You have to pay a "premium" (that just means price) to buy out your future ground rent payments. Because you are paying them all up-front, you get a discount on these future payments.
As part of our lease extension valuation we will do detailed analysis of the ground rent market to give us solid evidence to negotiate a fair discount with your freeholder's valuer.
The benefit of doing a Statutory Lease Extension is that you know at the end of the process your ground rent will never cause you an issue again.