Should I purchase a flat where the Ground Rent doubles every 10 years?

Reader’s E-mail:

The property I am looking to purchase is a 8 years old in a block of about 40 flats. The ground rent seems to be quite excessive.

Service charge is currently £1300 pa, and ground rent is currently £150.00 per year. However the ground rent doubles every 10 years of the term of the lease. The ground rent will therefore be £300 in 2017. As the rent doubles every 10 years, by the time 110 years have passed since 2007, the ground rent will be £153,600 per year.

Do I have any rights to contest this? Should I stay away from the purchase?

​Reply from Service Charge Dispute Guide​

1. ​Sometimes deciding whether it makes sense to invest in a leasehold property can be complicated and this is one of those occasions. What is complex in this situation is valuing this property, and this is specifically because of the Ground Rent provisions. If you are serious about the purchase you would benefit from good advice from a lawyer and a surveyor.

2. The law, as confirmed in the recent Supreme Court case of Arnold v Britton and others [2015] UKSC 36, does not allow a Leaseholder to challenge the reasonableness of Ground Rent. It’s a contractual obligation and as far as the Courts are concerned that is the end of the story.

3. What makes the situation more complicated is that after 2 years as a Leaseholder you have a right under Section 39 of the Leasehold Reform Housing and Urban Development Act 1993 to purchase a new lease with an extended term of an additional 90 years and a ‘peppercorn’ Ground Rent. Exercising your right to acquire a new lease would resolve your concerns about the ever increasing Ground Rent. To read more about the process of acquiring a new lease under Section 39 see our article entitled Rights and Remedies for Leaseholders.

4. The acquisition of a new Lease, however, does not come for free. A premium must be paid. The Government prescribes the formula for calculating the premium in Schedule 13 of Leasehold Refom Housing and Urban Development Act 1993.

5. It is much cheaper to acquire the new extended Lease if there is more than 80 years left to run. The cost of a Lease extension hikes dramatically when a Lease has less than 80 years left. For Leaseholders coming close to the 80 year mark they should be considering a Lease extension as a matter of course to avoid devaluing their property for this reason.

6. The big question here is the amount of the premium. This will, to a greater or lesser extent, determine whether it makes financial sense for you to invest in this property.

7. The Leasehold Advisory Service has a Lease Extension Calculator which will give you a rough idea of the cost. Bear in mind that this calculator, or indeed any of the other ones which are available on-line, will only provide a ‘ball park’ figure. You need professional help to consider all the factors properly. Bear in mind also that at the point of attempting to acquire the new Lease a shrewd and well advised Freeholder can attempt to ‘up the price’ by making claims in respect of plans to develop the property – a Landlord’s loss in respect of future development is one of the factors which Schedule 13 refers to as relevant in the calculation of the premium.

8. It is more than likely that Ground Rent provisions in the Lease have been drafted with Section 39 in mind. The amount of Ground Rent payable will have an impact on the value of the freehold interest in the property, and by including sharp rises in future levels of Ground Rent this is likely to increase the premium to be paid.

 

9. This said, it still remains the case that the question of whether this purchase makes financial sense is a matter of considering the asking price in relation to the amount of Ground Rent payable and the premium you might have to pay in order to escape the Ground Rent provisions in the Lease. If the figures stack up, even taking account of the premium to acquire the new Lease, and the purchase still seems a good one (and your professional advisers agree), then the Ground Rent provisions should not in themselves put you off.

10. As a final thought, if you aren’t prepared to spend the money on the professional advice needed to evaluate this purchase it might be wisest for you to move on and look for another property.

Click on the link to read more Reader’s Questions and Answers on Ground Rent

Click on the link to read more Reader’s Questions and Answers on Purchasing a Leasehold Property