There’s only one contender for a doubling ground rent clause on the lease of a flat, and that’s ground rent RPI – where the increases in ground rent are linked to RPI increases.
Doubling ground rent clauses have always been a huge issue and generally considered the worst case scenario. Plus, in recent years it has become even more of an issue with mortgage lenders, this is resulting in the majority of mortgage lenders declining loans unless the seller enters into a deed of variation, or a lease extension which would reduce the ground rent to a peppercorn (£0, or nominal fee).
However, due to the increased cost of living and inflation being at its highest in 40 years, the rate of RPI is one that cannot be measured at any one time which leads to huge volatility for those involved in a ground rent RPI clause.
Sales are falling through all over the country as ground rents over £250 are increasingly problematic.
In this article, I explore ground rent RPI, what this means for you, and whether you should buy a flat with a ground rent clause like this in the lease.
What Is Ground Rent RPI?
RPI (retail price index) based increases to ground rent means that the the current ground rent levels will raise with the rate of RPI within the terms of your lease, this could be every 10 or 25 years, for example.
RPI leases can be very problematic given current inflation levels, it won’t be long until ground rents linked to RPI will be far worse than leases with a doubling ground rent clause.
Why Is Ground Rent RPI An Issue?
Many mortgage lenders will not lend on RPI leases that are currently more than 0.1% value of the property, or with a ground rent more than £250 (outside of London). Many lenders are requiring a deed of variation or a lease extension which can cost thousands of pounds.
In February 2020 the CMA issued a report that said:
“…we have significant reservations about RPI based increases to ground rent. Moreover, lease provisions imposing ground rent and providing for its escalation to be obscure and hard to understand.”
Ground rent based on RPI is a poor situation at the moment, with RPI at nearly 12%, equivalent to a 6 year doubling interval. RPI should reduce when the energy market stabilises, but likely to be high for some time.
Freeholders know that the RPI increases will become unreasonable very quickly and the only way out is extending the lease.
Moreover, RPI based ground rent lacks clarity; RPI changes every 6 months making it impossible to work out for a lease extension, and for those preparing to continue paying their ground rent.
Ground Rent RPI Calculator
Whether it’s for your existing lease or for a flat you are considering purchasing, you may want to find out how much your ground rent could rise to with the current rate of RPI.
The equation to calculate ground rent in line with RPI is:
Ground Rent X RPI (at time of review date) / RPI (at beginning of lease)
As an estimate, you need the RPI at conception of the lease, date should be noted in your lease and even a value. Then today’s RPI, for example as you cannot predict the future. The difference of those divided by the original RPI will give you the % increase to be applied to your current rent. At least that’s how RPI increasing ground rent works. RPI at your increase date certainly won’t be less than RPI today.
The RPI values to insert can be found on the .Gov website that shows an RPI graph, and you are looking for values such as 268.4 ish. This graph shows a sliding scale which you can move to see the relevant values for your particular lease. This will give you an approximate idea of what your ground rent levels will be.
How To Get Around The Ground Rent RPI Issue
As the the ground rent RPI issue has become on par with a clause with doubling ground rent, many mortgage lenders will not lend on this basis.
As a seller or buyer of a flat with ground rent RPI, there is pretty much only two ways around this;
Deed of Variation
A deed of variation seems to be the first port of call that solicitors request (it also was in my situation when selling my flat), yet a ground rent deed of variation cost can set you back thousands of pounds, and is not the best solution.
It can be cheaper than a formal lease extension, but it can still take some months to completion. It will also not reduce ground rent to a peppercorn like you can achieve with a formal lease extension.
Some freeholders have been known to also reject an application for a deed of variation, it depends on what clause is being requested by the solicitor too.
Whilst I cannot give an approximate cost for a deed of variation as every freeholder will be different, I was quoted the below.
Without the initial enquiry fee, this could not be processed. Whilst my freeholder said it’s almost always approved, I have read of times where a deed of variation is rejected from the freeholder on this basis due to the amount of ground rent payments they miss out on over time.
- Initially we require an enquiry fee of £700 plus VAT = £840.00.
- This covers retrieval of the lease, studying it, consulting with the Freeholder and securing a valuation in order to arrive at the required premium.
- Once this information has been collected and assessed the details are passed onto our client.
- Heads of Terms (HOT’s) are then forwarded to you which will include the terms and conditions. Upon agreement please return the document signed and with a deposit cheque of £800.00 and your solicitors’ details.
- The sum of £800.00 will be deducted from the cost of the premium at the time of Completion.
- Upon receipt of the above items all the necessary documents will be drafted and forwarded to your nominated solicitor and we will manage the matter up to Completion.
- There will be a contribution towards our costs of £2,000 plus VAT = £2,400 which includes drafting all documentation executing them and taking this matter up to Completion. This fee is only payable at the time of Completion.
Formal Lease Extension
A formal lease extension involves setting the ground rent to zero (peppercorn) and it adds 90 years to the remaining term of your lease.
This is ultimately the best option, but likely to be slow and very expensive. This will often run into the cost of thousands of pounds. If you are selling, you could start the process, pass onto your buyer and negotiate the sale price to reflect costs.
A lease extension route is far more favourable for both parties due to this peppercorn ground rent. If you’re selling your flat, it will also make it much more attractive, and highly saleable. However, a lease extension can only be requested if you have owned the property for 2 years or more.
Should I Buy A Flat With Ground Rent RPI?
Inline with inflation as it stands, I would walk away from any leasehold sale where it has ground rent linked to increases in RPI, you have absolutely no control over it.
However, doubling ground rent is something that should also be avoided.
Ground rent is for ZERO SERVICE. There is totally no justification for leasehold which is why many are working towards a commonhold system.
In June 2022, the leasehold reform brought in new rules that leases on new builds must have no ground rent (peppercorn). These leases, and flats where they have already had a lease extension carried out are the more favourable options if you are currently looking to purchase a flat.
Unfortunately ground rent RPI is volatile, it constantly changes and is incredibly problematic where we are entering a decade of high inflation. I would personally never buy leasehold again, it’s like signing up for deferred debt, a debt which may overwhelm your financial resources in the future.
For further information and advice, I would highly recommend taking a look at the National Leasehold Campaign group on Facebook.
Before You Go…
If you read one more post, I’d highly recommend reading about my experience with owning and trying to sell a leasehold property and why I would never buy one again, it helps to have a clearer picture of what is actually involved in owning a flat which is essentially just owning a lease agreement…