Leasehold purchase and ground rent fear?

Reply mainly for Silversurfer. Did you make a complaint and claim against Powell Callen? They only went bust in 2013, so it may not be too late. If their insurance was defective the Law Society/SRA will look at it.

Besides all the above comments, if your daughter really wants to buy the place, by all means proceed but then after 2 years ownership seriously consider serving a Section 42 Notice to extend the lease by an additional 90 years with no ground rent or at worst a fixed peppercorn GR of eg £25 pa (statutory lease extension terms). If the flat with a long lease is worth e.g. £200,000 today & will still have 80 years of more left to run on the lease in 2 years time, it will cost anywhere between approx £6,000 & £8,000 including the cost of the freeholders legal / val fees which you're liable for. (don't let the lease run below 80 years otherwise you'll have the Marriage Value cost to pay on top). This £6-8,000 compares favourably to the cost of the GR payable now over say a 90 year lease term at £300 pa today, even if increasing every 10 years by only 1.5% p.a. = approx £3,000 in the 1st 10 years, £3500 next 10 yrs, then £4,000, followed by £4,600, £5,350, £6,200, £7,200, £8,350 over the last 10 years = over 90 years paying approx £42,200 (if inflation/index used is higher than 1.5% pa then of course it will cost a lot more at each 10 year GR review) vs approx between £6,000 & £10,250 (£0 - £2,250 GR over the 90 years + £6-8,000 to extend lease in 2 years time). Plus of course it might mean it makes it more saleable when ultimately your daughter wants to sell & move on. Just a thought.

I checked the other day and RPI inflation from 1977 to 2017 worked out a 4.5% p.a. compound although this did of course include some of the high inflation years of the 1970's and 1980's but equally some of the low inflation years since 2008. From now on, longer term, I expect inflation to average at around 3% but over the next few years because of Brexit withdrawal it could be higher than this.

It’s a two edged sword.

I would expect the Surveyor / Valuer to consider the cost of the rpi linked inflation when valuing the lease – ie the cost of the higher ground rent will be included in the lease extension. However, these figures are negotiable but you will pay for both your and the freeholders surveyor to negotiate. If the freeholder doesn't play ball (and you have a sound case) you have the option to take it to the land tribunal which I believe each party is responsible for their own costs.

You have 2 problems if you want to go for a Statutory Lease extension in the future. Assuming there is no marriage value then the value of the reversion is usually quite small and agreed between valuers working for each side. The valuers need to agree on a yield/capitalisation rate for the numerous income streams. With RPI linked ground rents they will also have to agree on the future rate for inflation. Another reason why in my case I opted for fixed monetary increases.

Reply to the comment left by at 09/02/2018 - 11:47
What are the 'numerous income streams' that you're referring to?

When a lease is valued for extension purposes the various income streams are valued on what is known as a 'present value' basis. Just to give a simple example. A 125 year lease started in 1988 at a ground rent of £100 p.a. doubling every 25 years. So at the moment in 2018 you have a lease at the moment that has 95 years still to run that expires in the year 2113. The present ground rent is £200 p.a. having doubled 5 years ago.
So you have the first 20 years at £200 p.a. this is the 1st income stream.
Then next 25 years at £400 p.a. but deferred for 20 years This means it is 20 years before this higher rate kicks in. This is the 2nd income stream.
The next 25 years at £800 p.a. but deferred for 45 years (20+25) 45 years before this income steam kicks in. This is the 3rd income stream .
The last 25 years at £1600 p.a. but deferred for 70 years (20+25+25). This is the 4th and last income stream.
How you value these income streams depend on the yield rate also known as the capitalisation rate.
Excel spreadsheet has special formulas that can work out PV or 'present value'. To get an idea of what I am talking about think about inflation rates. If I were talking about £200 annual income being paid out in 20 years time and inflation was only 2% then that 'future' income would still be worth having. However if inflation were at 10% per annum that future income would perhaps only buy a big Mac + fries.
Valuers working for a freeholder always try and argue for as low as yield rate as possible whereas the valuer acting for the leaseholder always tries to get the highest yield rate as possible. So it is contrary to what you perhaps initially think, when interest rates and yield rates are low then lease premiums are high - when interest rates and yield rates are high then lease premiums are lower.

These rising ground rents are the "way things are going" as the developers have seen a money spinner. It is however under consultation and likely to be outlawed as mis-selling. That does not help you though. Even an RPI increase could turn out very expensive. I wouldn't buy it.

I wished I shared your confidence in high ground rents likely to be outlawed any time soon. For new tenancies maybe yes, but help for existing tenants getting out of their existing leases may have the same priority for the government as getting rid of plastics in the UK, 25 years time in 2042!

If ground rent moves up after 10 years with RPI, then so should other expenditure and income. Therefore, you will be in no worse place in 10 years time than you are today.