Short lease, doubling ground rent and a downvaluation
Ms Latif has agreed to buy a one-bedroom flat for £185,000 with a 10% deposit. The flat is leasehold with 71 years unexpired, ground rent of £250 a year doubling every 10 years, and the freeholder is a company registered in Cyprus that has not replied to requests for a deed of variation. The valuer inspects and reports £170,000, citing the short lease and the ground rent review. The lender requires at least 70 years unexpired at the end of the mortgage term and will not lend where the lease may be an assured shorthold tenancy. Ms Latif has already exchanged contracts and paid a 5% deposit, with completion in 21 days.
1. Explain the valuation and legal problems and whether the lender is likely to lend at 90% LTV.
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Lease length. On a 25-year term the lease would have 46 years left at maturity, below the lender's 70-year minimum. The flat therefore fails policy even though 71 years looks acceptable today.
Ground rent. A review that doubles the rent is a lending issue in itself, and once the rent passes £250 outside London the lease may fall within the assured shorthold tenancy provisions of the Housing Act 1988, which this lender will not accept. The risk crystallises in 10 years, inside the likely holding period.
Valuation. The valuer's £170,000 is a market judgement reflecting both defects. At 90% LTV the maximum loan is £153,000 against £166,500 needed, a shortfall of £13,500 that the lender will not bridge.
Likely outcome. Decline. Three separate grounds: term, ground rent and loan-to-value. Do not submit and hope; get the lender's position confirmed in writing so the customer can act on it.
2. What options does Ms Latif have now, given that she has exchanged?
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This is now a conveyancing and negotiation problem as much as a lending one, and time is short.
- Ask the seller to extend the lease before completion. The best outcome: a statutory or voluntary extension to, say, 125 years and a deed of variation capping the ground rent. The seller has owned the flat long enough to qualify; Ms Latif has not, so she cannot do it herself.
- Renegotiate the price. A reduction to around £170,000 or below, plus a larger deposit, closes the valuation gap. She has leverage: the exchange price was agreed without knowledge of the valuer's findings.
- Find a lender with looser lease criteria. Some will lend with 40–50 years remaining at maturity, usually at a lower LTV and a different rate; that does not solve the downvaluation.
- Bridging or a family loan could complete the purchase, but that is borrowing to solve a problem created by borrowing and should be set against the customer's wider position.
- Completion risk. If she cannot complete she is in default, may lose the 5% deposit and face a claim for the balance. Her solicitor should be asked immediately whether completion can be deferred and whether the contract allows it. Advise her to speak to her solicitor today, not after the valuation is reworked.
3. Does the Leasehold Reform (Ground Rent) Act 2022 solve the ground rent problem here?
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No, and it is important not to reassure the customer on this point.
The 2022 Act restricts ground rent on new leases granted on or after 30 June 2022 (with limited exceptions such as business leases and some retirement schemes). It does not rewrite existing leases. This flat's lease predates the Act, so the £250 doubling review survives the purchase.
The only ways to change it are a deed of variation agreed with the freeholder, or a statutory lease extension, which would also deal with the term. The freeholder's non-response matters: an absent or offshore landlord can be dealt with through the statutory procedure, including the tribunal, but that takes months, not the 21 days available here.
Practical point: the lender's real concern is not the £250 but what the rent becomes and what the lease looks like in 20 years. A deed of variation giving a peppercorn or fixed rent and 125+ years is what turns this from an unmortgageable flat into a standard one.