Due to fresh focus in the property sector, onerous levels of ground rent continues to be the biggest reason that flat/leasehold sales are falling through, and mortgage lenders won’t lend.
The issue is when ground rent levels exceed £250 (outside of London, £1,000 in London) it becomes an AST which means that should the rent be defaulted and falls under an Assured Shorthold Tenancy agreement, the landlord would first get possession of the property, rather than the mortgage lender.
This of course lands mortgage lenders in hot water as they want to be able to protect their investment. Lenders have made a decision not to lend if the ground rent is over £250, or more than 0.1% of the property value.
They also take into consideration ground rent terms in the lease, often clauses state it doubles every ten years, or rises with the rate of RPI every 10 years. The issue with this is that even if your ground rent won’t exceed £250 for 10 years and some, lenders are still being extremely cautious and won’t lend unless certain conditions are met.
Deed of Variation For Ground Rent
A deed of variation is often the first request the lender will make. A deed of variation protects both the lender, and purchaser. Typically a deed of variation in regards to ground rent will insert a new clause that states the ground rent can’t be increased for the remainder of the lease.
There are a couple of issues with a deed of variation, it stops the ground rent from increasing, but does not reduce it to a peppercorn. In this case, a formal lease extension would be a better option because it adds an additional 90 years to your lease, whilst reducing the ground rent levels to a peppercorn.
The second issue is that a deed of variation does not come cheap. With the legal fees and the premium that will be made payable, this could easily run into the region of thousands of pounds. The premium is worked out based on the amount of ground rent that will missed out on during the remainder of the lease.
These two routes remain the most favourable for getting a leasehold sale across the line with ground rent exceeding £250, however, an indemnity policy for ground rent could be a way around this.
What Is An Indemnity Policy For Ground Rent?
An indemnity policy for ground rent is called forfeiture of lease indemnity. If the landlord exercises their right to regain possession of the property because the leaseholder falls into ground rent arrears, the lender would be protected.
There is a limit on indemnity of up to about £234k of a property price, and it ONLY protects the lender, not the purchaser.
The indemnity insurance is a one off payment and is usually anywhere between £50-£100, this depends on the value price of the property that has been insured. This is payable once and can be organised by your solicitors, it should be made payable by the seller of the property.
Mortgage lenders are clamping down on this and it will depend on the lender whether an indemnity policy is accepted or not. The purchaser has to also be happy with the fact that this is only protecting the lender, and not their own investment. You can check the updated lenders financial handbook to see what specific lenders will accept indemnity cover.
Selling a flat with ground rent over £250 is nothing but a headache, with many leaseholders having to spend thousands of pounds for a get out clause.
Ground Rent Indemnity Policy Cost
A ground rent indemnity policy can cost anywhere between £50-£100 in most cases, this is dependent on the price of the property that is to be insured.
I personally explored both a deed of variation and indemnity insurance, but I had to give the indemnity policy a shot because £14k worth of costs for a deed of variation just wasn’t going to happen. Luckily, the indemnity policy was accepted by the lender, costing me just over £50. The lender and purchaser were both happy with this option, and I was able to say goodbye to leasehold forever.
If you are in the process of selling a leasehold, there are options, do take a look at the National Leasehold Campaign Facebook group which is filled with leaseholders and advice from those going through the same issue.