Will rent ground the sale of my leasehold flat? - Gareth Shaw

Dear Gareth, I am trying to sell my leasehold flat. It has around 90 years remaining on the lease and the ground rent is currently around £175 a year. This increases by £175 every 15 years – the next increase is in 2029. I accepted an offer but the buyers insisted that we get a deed of variation to fix the ground rent with no increases and claimed that without a change to the ground rent, they would deem the property ‘unsellable’ in the future. The landlord refused, so the buyers pulled out. I’m really worried now that I won’t be able to sell my property. I can’t afford to extend the lease, especially now that I’ve missed the first stamp duty holiday. What can I do?

Buying and selling properties is one of the most stressful experiences.
Buying and selling properties is one of the most stressful experiences.

Gareth says…

I have a great amount of sympathy for you in this situation. Buying and selling properties is one of the most stressful experiences, and having a property entangled in the complexities of the England (and Wales’) complex land laws only exacerbates things.

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Let’s start with something positive. I don’t believe you live in an unsellable flat. Yes, your lease length is shorter than what most property solicitors and estate agents would like when dealing with a leasehold sale – their preference tends to be 100 years or above. But there is still a decade until you reach the dreaded 80-year mark, which creates far greater problems for leasehold owners and future owners

Anyone looking to increase the length of the lease when it is at less than 80 years will face paying thousands of pounds more to do so. This is because, at this point, the freeholder of the property is entitled to half of the ‘marriage value’, which is essentially the increase in value of the property generated by extending the lease length.

You have ruled out extending the lease, but there are obvious benefits for your sale. As you have owned the property for more than two years, you have the right to add another 90 years to your lease and move to a ‘peppercorn’ ground rent, typically £1 a year. The obvious advantage here is that no potential buyer can grumble about the length of lease or level of ground rent, and it might even boost your sale price. We’ll talk about this later.

This is a complicated area. I spoke to Will Thomas, Senior Associate at BDB Pitmans and expert on leasehold issues about your case.

The main issue you report is that your former buyers did not like the ground rent clause. As things stand, the ground rent will be £350 in 2029, £525 in 2044, £700 in 2059, £875 in 2074, £1050 in 2089 and £1,225 in 2104, when the lease expires.

Mr Thomas told me that this is certainly not the most onerous ground rent clause he has seen. You may have read about the plight of some leaseholders who have such punitive ground rent clauses – which sees ground rent doubling every 10 or 15 years - that the annual costs could end up running into thousands of pounds a year. Apply that to your scenario, and your clause seems benign in comparison – at the end of the lease, a doubling clause would be annual ground rent of above £10,000.

These clauses have caused major problems for people – some banks tend to be unwilling to lend on properties where ground rent exceeds 0.1%, though many can be more flexible. In your case, this would be more than £400 pa, not an issue until 2044.

There is one issue. In 2089, your ground rent will exceed £1,000 per annum. Will Thomas told that at this point, a long leasehold is converted into an assured shorthold tenancy (for properties in London, the tipping point outside of London is £250). This poses some risk to the leaseholder (and future owners), in that possession of the property can be returned to the freeholder if rent is not paid for a period of three months.

The reality, Mr Thomas told me, is very different. He said it is extremely rare for landlords to start possession proceedings, and mortgage lenders tend not to be so worried about the Assured Shorthold Tenancy risk. ‘For a seller to lose a buyer on the basis that the ground rent will exceed the statutory threshold for an AST in 2089 is ridiculous’, Mr Thomas said.

He suggests negotiating with your landlord and asking it to carry out a deed of variation that essentially says that it won’t initiate possession proceedings. You should seek professional advice from a leasehold lawyer. You can also purchase indemnity insurance, which will give the buyer’s lender the confidence that they won’t lose out in this scenario.

I think the main reason not to worry is because many of these seemingly perilous outcomes for your lease should become moot for the next owner of your property. Over the next year, the government is radically overhauling the leasehold sector – enabling leaseholders ‘to extend their lease to a new standard 990 years with a ground rent at zero’, according to the Department for Housing, Communities and Local Government. Ground rent caps will be introduced, marriage value will be abolished, and it will be easier and cheaper to extend leases or buy the freehold. The scales of power are going to be tipped towards leaseholders, and future owners will be the beneficiaries.

Gareth Shaw is head of money at Which?

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Thank you

James Mitchinson