I didn’t realise having a flat with ground rent over £250 was an issue until I was in the process of selling my own flat with a ground rent (outside of London) which already stood at £250 per year. Why was I only just now finding out that this could cause my flat to be virtually unsellable? I didn’t realise just what a mistake it was to own a leasehold property until the final year where a new freeholder took over and service charges and demands went through the roof. It started to feel like I was just a tenant paying rent, which in some respects owning a leasehold property is.
Anyway, it seems that the issues regarding ground rent over £250 rose its ugly head around 2018. Due to fresh focus in the legal sector, ground rent which exceeds £250 outside of London (greater than £1,000 in London) is classed as an AST, or an assured shorthand tenancy. This essentially means that if the leaseholder doesn’t pay their ground rent demand on time, then you forfeit the lease and the freeholder can take hold of the property whilst the mortgage lender is left with nothing. This is becoming a big issue with mortgage lenders as they will simply not lend on this criteria.
However, the AST is just one issue you could encounter with having ground rent over £250. Once the ground rent goes above 0.1% of the value of the property, some lenders start refusing according to the latest financial lenders handbook. This might not be an issue now for your leasehold property, but with some leases doubling the ground rent ever 10 years, this could be an issue in the not so distant future that mortgage lenders do look for. In addition to this, although not confirmed (but heard from a local estate agent), a new recent problem could be the valuation of a flat. Surveyors are beginning to value flats less than they were before to cover themselves in case of a market crash as after the pre 2008 crash valuations, some surveyors were sued for inflated valuations.
Indeed, having a leasehold property with a ground rent already, or set to surpass the levels of £250 is incredibly concerning. After being in the process myself, the good news is that there are ways around this, some which do come at the cost of thousands of pounds.
How To Sell A Flat With Ground Rent Over £250
From being guided by my solicitors and after lots of legal research, speaking with my mortgage adviser there are a few ways around this as the current climate and lending regulations allow.
Deed of variation
The first request from a mortgage lender and the purchasers solicitors will be a deed of variation. A deed of variation involves making legal changes to the lease, in this instance I was requested to make a deed of variation where the ground rent would remain at £250 for the rest of the lease, which would also avoid it becoming an AST. A deed of variation cost can be somewhere in the region of thousands of pounds. But it is completely dependent on who your freeholder is. As landlords are unregulated they can unfortunately charge whatever they see fit. As an example of costs, my freeholder (Urban Point) was charging £2,400 for the initial enquiry, I had to pay this before I could even find out what the premium would be. The premium is essentially a sum of money that they would see fit that covers them for the amount of money they would be missing out on with the ground rent remaining at £250 for the rest of the lease. I was told this could be in the region of £10k-£14. This could take anywhere between 3-6 months to be completed. It is not a cheap route, and in my opinion there are better legal routes to get around this issue which completely eradicates ground rent.
Formal Statutory Lease Extension
This option is in my opinion more favourable than a deed of variation because it is much more attractive to potential buyers, and onward saleability. A lease extension adds another 90 years on top of your remaining lease terms whilst it reduces ground rent to zero. This is by far the best option if you can do this, however it is something you want to do before you begin the selling process as it can take months to be completed, and it comes at a cost. This could be thousands of pounds to do this, but it is all relative as to who you current freeholder is and what their costs are. The premium is likely to be more than on a deed variation as ground rent is being reduced to a peppercorn.
Indemnity Insurance Policy – Forfeiture of Lease Indemnity Insurance
This is the ‘quick fix’ option that may or may not work. One of the biggest issues with rising levels of ground rent is that it poses a level of risk to the mortgage lender. When ground rent tips over £250 it becomes an AST, this means the landlord could easily take possession if the owner fell into ground rent arrears. Taking out an indemnity policy protects the lender against this happening.
One thing to note is that this will NOT protect the purchaser, and help with onward saleability. The mortgage lender handbook is constantly changing and whilst some lenders will accept this, others won’t. I would always recommend getting your solicitor to put this option forward first as it is by far the cheapest way to do this, and I’m sure anyone would be willing to try this before parting with thousands of pounds. By some stroke of luck, this was how I was able to sell my flat in the end. An indemnity insurance policy that cost the grand total of £50. Although, you cannot pre plan selling a flat in this way, as I was 3 months into the selling process when this issue only reared its ugly head and it literally fell on the balance of waiting for the lender to come back and say yes or no. If you can cope with the stress and anxiety of losing your onward purchase, then go for it. I would also say in hindsight that if you have a good conveyancer, they probably wouldn’t allow the purchaser to settle for just an indemnity policy. An alternative to this situation is to open yourself up to cash buyers only who will not experience the same lender issues, however, they still might be concerned about future saleability.
The good news is that there are options when it comes to selling a leasehold property with onerous levels of ground rent, and even doubling ground rent terms. If I was to sell my flat again, I would have made sure that I had put plans into place 3-6 months in advance in regards to this to ensure I was well versed and setup for these issues. Having said that, there would have been no way I would have been able to part with £10k pre selling, and this causes a lot of leaseholder owners to be stuck between a rock and a hard place. I was lucky that an indemnity policy was accepted, beyond lucky. Looking for cash buyers is probably a safer bet as it stands as you will not fall into any lending issues, although I was informed by my solicitors at the time that if I was to do this I would need to sell at a lower price because of the ‘lease defect’.
If you are in the process of selling a leasehold property with ground rent issues, good luck! I would strongly recommend joining the National Leasehold Campaign group on Facebook which has thousands of members who have have been in a similar position.