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Beware the hidden costs of ground rents
On 21 January, Sir Peter Bottomley MP tabled an early day motion in the House of Commons requesting that Flat 1 Blythe Court, Solihull, be withdrawn from an upcoming auction. The motion was tabled because the sellers were apparently "withholding essential information of penal ground rent provision that make the premises worthless". The property was indeed withdrawn and the legal pack removed from the auctioneer's website.
What was it about the property that caused such a concern? We cannot speculate on what the legal pack contained, but we have obtained a copy of the lease for the property from the Land Registry.
The lease, like most flats in England and Wales, contains a yearly ground rent which, for 1 Blythe Court, is £250 "during the first 10 years of the New Term hereby granted and the annual rent during every successive 10 year period of the New Term twice that which was in the previous 10 year period".
This ground rent was introduced in 2014 by a deed of variation, which also extended the lease term from 99 years starting in 1961 (the "Original Term"), to 160 years starting in 1961 (the "New Term"). So, on careful reading of the lease, the initial £250 ground rent is backdated to 1961 and doubles every ten years. Since 1961, the rent has doubled five times and is now £8,000 a year. Over 12% of the guide price! This compounding means that in 2021 the rent will increase to £16,000 a year and by the end of the lease it will be over £8m a year.
The case is a vivid reminder of how compound interest can turn very small sums into very large ones (read our previous blog about a 10% annual service charge increase).
Had the ground rent at 1 Blythe Court been described in the lease by using the table below instead of a formula, we very much doubt the leaseholder would have agreed to it.
If tenants and leaseholders are offered fixed rent increases, they should tread carefully and make sure they understand what they are signing up to.
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