Ground Rent · Report on Title scenario

My ground rent rises with RPI — what will it become?

Nobody can tell you, and that is the point. A rent reviewed against an index moves with the index, so unlike a doubling clause there is no figure to write down for the year 2070. That unpredictability is what lenders and their valuers react to: an affordability assessment has to take account of known future changes, and a formula that is known in method but unknown in result sits awkwardly in that exercise.

From the e-ROT archive

This scenario is drawn from Report on Title material dealing with this specific circumstance.

Historic Report on Title wording: The Ground Rent · See the wording

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I’ve already bought the property The ground rent has risen since I bought and I want to understand what was explained. Check what this could mean →WhenIBought.com I’m a conveyancer I need Report on Title wording for this situation. View professional options →

Known method, unknown figure

A review clause of this kind names a starting rent, an index, and the intervals at which the rent is recalculated — commonly every ten years. The clause is doing something quite reasonable in principle: holding the rent’s real value steady rather than letting inflation erode it. The difficulty is practical rather than philosophical.

Where the rent increases by reference to a recognised formula such as the retail prices index, it is difficult to predict with any certainty what the future ground rent will be. A doubling clause tells you the worst case at the outset. An index-linked clause tells you the method and leaves you to guess the inputs, over a term that may run for another century.

Read the clause rather than the summary of it. Index-linked clauses vary on points that change the answer considerably: whether there is a floor below which the rent cannot fall, whether there is a cap, whether an "upwards only" provision applies, and which index is named — RPI and CPI have diverged materially and for extended periods.

Already bought, and the ground rent has gone up?

If the review clause and its effect on value were not spelled out before you completed, that is where to start.

Find out what should have been explained → WhenIBought.com

What it does to a lease extension

This is the consequence that surprises people, because it arrives years later. The premium payable for a statutory lease extension reflects, among other things, the ground rent the landlord gives up, since the new lease is at a peppercorn. A large rent, or a clause with the potential for large increases during the term, increases the premium.

So an index-linked review clause is not only a cost while you hold the lease. It is a cost at the moment you try to get rid of it, and the longer the clause has had to operate, the larger that cost. The same applies to collective enfranchisement: a high ground rent throughout a building affects what the leaseholders collectively have to pay for the freehold.

Where the flat might be held for a long time, that argues for getting a valuer’s view on the clause early rather than at the point of sale — which is also when the figure is least negotiable.

Where this sits with lenders

Conveyancers now refer ground rent escalation provisions to the lender and its valuers as a matter of course, and lenders have become specific about what they will not accept. The Lenders’ Handbook asks the conveyancer to consider and, where necessary, report likely increases of potential concern.

Nobody can guarantee that provisions acceptable to a lender today will be acceptable to a lender in ten years’ time, and the trend over the last decade has been towards tighter rather than looser requirements. That is a reason to establish the position now, not a reason to assume the worst.

Why an affordability test cares about a ground rent review

Lenders are required to take account of known future changes to a borrower’s income and expenditure that could affect the affordability of the mortgage. A ground rent that is scheduled to rise is such a change, so the level of the rent and the way it increases over the mortgage term feed directly into the assessment.

There is a second exposure behind the first. Where a future leaseholder disputes a reviewed rent and withholds payment while in dispute, the lease can be forfeit and the lender’s security put at risk — so a review clause is not only an affordability question but a title one.

Requirements here are lender-specific and have been tightening. What a lender accepted on a comparable flat a few years ago is not evidence of what it will accept now, and the current instructions are the only reliable source.

Research lender requirements → Lexsure Lender Archive

From the e-ROT archive

Report on Title paragraph

The Ground Rent

Archive Lexsure e-ROTScope RPI-linked rent reviewWord count 80Published June 2022

The current Ground rent is £200.00 per annum. This is to be increased in accordance with the Retail Price Index (RPI). Where the ground rent increases in accordance with a recognised formula such as the retail prices index making it is difficult to predict with certainty what future ground rent could be. A large ground rent or the potential for high increases during the term would most likely increase the premium payable for a lease extension or freehold purchase. …

Historic wording — DO NOT USE on a current transaction. This paragraph was published in 2022 and is shown to illustrate how the issue has been reported, not as current wording. It is reproduced exactly, including the garbled “making it is difficult”. Lender requirements and the reform position have both moved since.

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