Pugnacious advocate for reform, leasehold valuer and LKP trustee, LOUIE BURNS explains why the good behaviour ‘pledge’ by freeholders worked up with government is full of perils …
Leasehold valuerBeware of freeholders bearing gifts – The truth about the Government’s freeholder pledge
Freeholders launch clandestine plot to outflank leasehold reform and make millions of homes unsellable
On 28 March, the Government announced a voluntary industry pledge which, it naively believes, will be enough to end the suffering of thousands of leaseholders trapped in a leasehold nightmare.
Cooked up with the largest property developers and freeholders in the land, the Government-backed pledge promises to end the exploitation of leaseholders.
Indeed, the very people responsible for inventing exploitative tools like doubling ground rents, service charges and permissions clauses – which create untold hardship and misery to leaseholders – have finally ridden to the rescue, committing to free existing leaseholders trapped in onerous deals and stating that freeholder abuses have gone on long enough.
The Communities Secretary, James Brokenshire MP, said:
“Since becoming Communities Secretary, I have repeatedly made clear my ambition to end those exploitative and unfair leasehold arrangements that have no place in a modern housing market.”
Housing Minister, Heather Wheeler MP, was also pleased with herself:
“We want to make sure we have a leasehold system where people are able to challenge exorbitant rates and high service charges. It is unacceptable that the burden of legal fees – potentially running into tens of thousands of pounds – is preventing people from seeking justice. The plans announced today will stop leaseholders from picking up the tab for unjustified legal costs – creating a housing market that truly works for everyone.”
Thank goodness freeholders have finally found their humanity. It may have taken them a while but now they’re committed to sorting the whole mess out for every leaseholder in the land…
Hold your horses. Not so fast…
As we’re going to find out, this voluntary pledge is just a smoke and mirrors exercise to lull us all into a false sense of security. Behind the scenes, sinister forces are gathering to cement freeholders’ interests and outflank the leasehold reform agenda.
The consequences could cost leaseholders tens of thousands of pounds each and could leave millions of leasehold houses unsellable.
Housing Communities and Local Government Committee Chair, Clive Betts MP is right to distrust the scheme. He said: “Despite the catalogue of problems highlighted in our report, they (the Government) have chosen to trust the developers and freeholders who created these onerous leases in the first place to decide how to make the system fair.
“Given the evidence we heard from leaseholders during our inquiry, we know it will be difficult for them to trust developers and freeholders to deliver on such pledges anyway.” Clive Betts is right to raise the issue of trust. How can any rational leaseholder, looking at the way they have been exploited for decades, possibly believe the freeholders now have their best interests in mind? As ever, freeholders are only interested in three things: Profit, profit and yet more profit.
What is the truth about onerous ground rents right now?
Understanding valuation is vital, so let’s take a quick look at how we calculate the cost of a lease extension or freehold acquisition.
Many of the homes with onerous ground rents caught in the ‘leasehold houses scandal’ tend to have long leases. This means when we calculate the cost of buying the freehold, the only calculation we need to make is to compensate the freeholder for their loss of ground rent when the house is enfranchised.
For this calculation we have just one variable that must be agreed between the leaseholder and the freeholder; this is the rate of compensation used to calculate the loss of future ground rent.
This is known as the capitalisation rate (Cap rate) which we use to calculate the cost to enfranchise. It may sound innocuous, but the Cap rate has huge implications for the costs that leaseholders will pay.
While the Government and freeholders are slapping each other on the back over their freeholder’s pledge, many of the huge pension funds (which own vast ground rent portfolios) are very quietly spending a fortune trying to establish case law which aims to fix this cap rate massively in the freeholders’ favour.
If they are successful it will cost leaseholders who moved from doubling ground rents to RPI under this voluntary scheme thousands more to buy their freehold than it would do currently!
What are they looking to do?
Traditionally the Cap rate has been the least contentious element when agreeing the cost of a lease extension or freehold purchase. So much so, there is virtually no case law that can guide us. In the 17 years we have been in business 99% of our 10,000 settlements have seen us agree a Cap rate of between 6.5% and 7%.
However, this all changed about 18 months ago. Suddenly freeholders started to spend hundreds of thousands of pounds on legal fees and financial experts to set case law that says the Cap rate should be lower than 3%. And they’ve already seen some success!
In the most significant First tier Tribunal case from last year, known as ‘All Saints’, the freeholder achieved a very favourable decision from the judges which could have huge detrimental consequences for all leaseholders with onerous ground rents.
The valuer acting for the leaseholders wanted a 6% Cap rate, as he said this is the ‘industry norm’. The valuers acting for the freeholders originally proposed a Cap rate of 2.9% but altered it by the time it was heard to 3.09%. After a prolonged complex hearing the judges decided a Cap rate of 3.35%.
What does that mean for those who own leasehold houses with onerous ground rents?
Let’s look at a comparison of what this will mean in pounds and pence for owners of leasehold houses. The figures we use are for a house valued at £160,000 with a long lease.
The examples below show what effect a 3.35% cap rate would have on those people already caught in the leasehold house scandal.
If a house is worth £160,000 and the ground rent doubled every ten years until the fiftieth anniversary of the term, the cost of the lease extension would be:
Cost of freehold purchase with a Cap rate of 7% = £18,000
Cost of freehold purchase with a Cap rate of 3.35% = £92,000
If a house is worth £160,000 and the ground rent is linked to RPI reviewed every 10 years, the cost of the lease extension would be:
Cost of freehold purchase with a Cap rate of 7% = £4,500
Cost of freehold purchase with a Cap rate of 3.35% = £9,500
Hang on a second! If the freeholders set case law that stipulates a Cap rate of 3.35% then they would receive £74,000 more from anyone with a 10 year doubling ground rent and £5,000 more from anyone who had signed their lovely voluntary scheme which changed doubling ground rents to ones linked to RPI.
In short, to offset the lost revenue from onerous ground rents, freeholders intend to set onerous cap rates.
It is easy to see that a legal precedent that sets the Cap rate at 3.35% would be disastrous for leaseholders and the property market in general. It would make it impossible for any leaseholders to purchase their freehold or extend their lease.
It would have a huge impact on the returns the Help to Buy scheme would receive, as leasehold property prices would fall even lower.
It would be much harder for the government to prescribe the Cap rate element of the valuation method to make the process ‘cheaper, easier and more transparent’ for leaseholders (as they have promised, but so far failed, to do), as freeholders could argue material loss citing the Upper Tribunal case.
Why this is particularly unfair on leaseholders?
Freeholders are prepared to spend a fortune on the best barristers and experts to set case law as the value of their freehold portfolio will rise exponentially if case law is set in their favour.
Leaseholders can never match the financial might of freeholders looking to argue their new precedent. I have no idea of the legal costs the freeholder spent in All Saints but they paid for one of the best barristers in the field and financial experts too who produced expert reports. The bundle of evidence they submitted to the Tribunal contained 2,200 pages of documents! The leaseholders had paid their valuer a few hundred pounds to argue their case. It is a battle as mismatched as David vs Goliath!
The freeholders are running very complex and unfeasible arguments to try to establish that Cap rates should be set at a much lower percentage. Due to historically low interest rates, they argue that returns on 25-year index-linked gilts (Government bonds) should be used as a benchmark for Cap rates, as well as RPI swap rates, LIBOR rates and yields from ground rent sales at auctions. If Cap rates are linked to the miniscule interest rate on gilts, the consequences will be disastrous for leaseholders.
Even if the judges involved in these cases truly understand these arguments fully, it is doubtful that they are qualified to make decisions based on this evidence. They are Property Tribunal judges after all, not financial experts regulated by the FCA. This is especially poignant when their decisions will adversely affect millions of leaseholders.
Who will be affected if a low cap rate becomes case law?
Obviously, all of those people who bought leasehold houses. For those who have ground rents that double every 10 years the cost to buy their freehold would be so eye-wateringly high as to make it pointless. In many cases they would be paying more than 50% of the actual value of their home simply to acquire the freehold title.
The scale of this travesty is much bigger though. It would also have huge consequences for any leasehold property which has onerous ground rents or aggressive accelerators.
Then there are the many thousands of leaseholders that are hoodwinked into signing up for ‘informal’ lease extensions offered by their greedy freeholders every year. I get messages from concerned leaseholders every week who have been offered these ‘deals’, many of them from the very freeholders who have signed the Government pledge. These deals will leave them with homes that are unsellable.
As an example, we were in Tribunal last year against a freeholder who had got a leaseholder to sign up to one of their ‘informal’ deals a few years previously. Instead of extending their lease by an additional 90 years and reducing their ground rent to zero, they had opted for a ‘deal’ that extended their lease back up to 99 years and included a very onerous ground rent which doubled every ten years.
That leaseholder would not have needed to extend their lease for another 90 years if they had exersided their statutory right. Now however, some 15 years after paying for the lease extension they needed to extend again to prevent the lease falling below 80 years.
The freeholder then tried to argue a 3% Cap rate. This meant they wanted the leaseholder to pay £245,000 for a lease extension because of the terms of the informal deal they got the freeholder to sign previously. The property at the time was worth £390,000, so the lease extension would have cost a staggering 62% of the property’s value!
Clive Betts MP is correct to be concerned
It is deeply worrying that at the exact same time as signing a pointless pledge to treat leaseholders fairly, many freeholders are rushing to set case law which would see millions of leaseholders left with homes they could never sell and never afford to enfranchise.
It seems Mr Betts was right when he stated it would be “difficult for them to trust developers and freeholders”. In effect the freeholders are smiling to leaseholders faces, while sharpening long knives for their backs.
If this is allowed to go unchecked by Government, the consequences will be devastating for leaseholders who could never afford to fight these mighty freeholders in Tribunal. The Government must act immediately before a legal precedent is set. Failure to act would dwarf the misery wrought by the current leasehold scandal.
Caveat Emptor (Translation – It’s all your fault leaseholders!)
Freeholders have a tried and tested phrase when leaseholders complain about the abuses they suffer. Caveat Emptor they glibly say. Buyer beware! The leaseholders either knew what they were buying or they didn’t obtain the correct legal and valuation advice before they signed the contract.
Freeholders bleat on about their human rights and the sanctity of contract law (funny, I didn’t know there was such a thing as the human right to exploit other people). The Government in turn are tip-toeing around them and their human rights as they try to change leasehold legislation in favour of the leaseholders. Unfortunately, freeholders understand far more about our arcane, archaic leasehold system and have so far managed to stay several steps ahead.
In fact Caveat Emptor is not a fitting argument. Cap rates have been uncontested since the leasehold legislation came into force. If you bought a leasehold house a few years ago, even with the best advice money can buy you could never have predicted that freeholders would be spending a fortune looking to change Cap rates.
That is not contract law. It is case law which can easily be set by whoever has the deepest pockets. Depressingly, that is the history of leasehold in this country.
If Mr Brokenshire’s amibition is really “to end those exploitative and unfair leasehold arrangements” He will need to take some quick action. It is now time for the Government to forget window-dressing pointless pledges and step in to prevent further financial abuse and make it fairer for leaseholders once and for all.
It’s high time the leaseholder’s human rights became the focus.
Related posts:
Ground Rent Addicts Anonymous sign Brokenshire’s pledge (three years after the scandal they created and denied existed)
Communities Select Committee reject the lobbying nonsense of the freeholders’ good behaviour ‘pledge’
Ground rent scandal risks becoming full-blown crisis as loans are refused on blighted homes
Taylor Wimpey more greedy than the ground rent ‘Mr Smallweeds’ (and so are other plc housebuilders)
Taylor Wimpey ground rent explanation ‘not true’, BBC is told
Social landlords should not be abusing their unbalanced powers against leaseholders
would not a solution be to
1) have it linked so the rise is the lower of the RPi or average earnings in that way the rent can never become a burden
or
2) have a clause limiting the rent to 0.1% of the value of the flat
In all cases the NPV of the rent to be shown next to the premium with SDLT calculated on the total so there is no risk of any unsurprising terms being sneeked in
The only solution is a peppercorn ground rent.
Why is it so difficult to see this? Ground rent is simply money for nothing that has wider cost implications for leasholders wanting to extend their lease whilst also posing a risk of grossly dispoproprtionate foreclosure. The arguments in favour of freehold are well rehearsed and simply don’t hold water. Plenty of leases already offer a peppercorn rent with no detriment to the way the property is managed and maintained. I can only surmise that it is the uninformed, the foolish, or those with a vested interest that would continue to support such a thing in this day and age.
You also suggested earlier that buyers had a choice, so it seems you have little sympathy for those now stuck with unfavourable lease terms. Inthink your pisition is misguided. ‘Hobson’s choice’ is not a real choice. The reality is that people have been exploited and effectively forced to accept ground rent terms because there was no viable alternative for them. A genuine choice will only exist when there are other viable options. That will only happen by legislating, including to tackle ground rent which only serves to underpin a feudal system which needs to be dismantled. Those who have been caught out by a system that is not fit for purpose will need help in due course too.
Stephen,
RPI linked ground rent can also be onerous and make a property unmortgageable. All it takes is for the initial ground rent to be high and increases frequent.
Yes a lease which limits the ground rent to 0.1% of the property value would help., but you will struggle to find any developer or freeholder offering this.
Also you missed the major point in the article. If the occupier wishes to enfranchise to free themselves completely… the freeholders are working to change the capitalisation rate (which is not in the contract) to such level that it would be completely ridiculous.
That leaves the occupier completely up a certain creek without a paddle.
Stephen Would not a solution be
Rebase all existing ground rent at £1 and stop all new ground rent charges on new builds including Help to Buy.
Ground rents are indeed for no service and are therefore a burden on the property that needs to be considered at the time of purchase . The greater the rent the more the discount that should be sort for the imposition of such a rent
If purchasers fail to consider the terms when represented by professionals over an extended period often if a few months then in almost all cases the blame must fall on the purchaser and their advisors
If the rent is to be removed then adequate compensation needs to be paid to the receiver if the rent – he has put the terms on the table and a lessee at the time of purchase agreed to them . Arguments that purchasers are naive or it was all dressed up in legalese seems so weak when professional advisors were in the background
My comments do not apply where the advisors were suggested by the developer and have failed to act correctly or where terms are drafted to deceive such as confusing rateable value with rentable value
A ground rent which is structured so as to keep its purchasing power the same throughout the term is wholly reasonable . As prices rise then the rent will rise and most likely house prices will respond in the same direction there may we’ll be a delay and the link may be casual
To seriously suggest a rent of say £300 per annum linked to inflation should be so frightening as to make the sale prospects of the property bleak is evidence of near outbreak of hysteria that now engulfs the subject
This hysteria now means any lessee that took on a ground rent whose terms are linked to inflation now funds the flat difficult to sell – so the debate surrounding leasehold as backfires in part and injured hose who before the outbreak had not issue with their rent
The debate will address some needed reforms but the direction of travel seems to be that any ground rent is a blight on the property and effect it’s sale prospects . Yet it was an agreed term of a contract
Stephen, further to your comments:
If GR is to be removed and was only ever a contractual event of a Peppercorn Rent that maintained contact between Freeholder and Leaseholder.
For it then to be included in a lease extension ie if one purchases a lease extension after 33 years of a 99-year lease doubling every 33 years at original GR of £48.
A leaseholder would pay £11,088.00 in GR over the 99 years. They would be required to pay for the loss of this GR if a 90-year extension was requested, plus a Mariage Fee making a potential total of £13,000 plus, is this figure correct?
This amount is roughly one-third of the original sale price of a flat purchased in 1986, you are saying this is acceptable?
Unless you understand discounting then the figures you have quoted will seem frightening and bizarre
Your argument would suggest that if the UK offered a bond paying a pound a year for a trillion years they could offer this to settle the UK liability to the Chinese
A pound today is far more valuable than a pound in 70 years time and this is reflected in the discounting formula
Stephen, I do understand Discounting and the figures are only the tip of the Iceberg as Leasehold Exploitation includes Excessive:-
Doubling Ground Rents
Service Charges
Management Fees
Welcome Packs
Commissions from Insurance & Building Maintenance
Permission Clauses
Contingency Funds
Exit Fees
Updating Emergency/Fire Systems
Those involved in the Exploitation can be any of the following:-
Freeholders & Agents
Landlords & Agents
Managing Agents & Contractors – Sub-Contractors
Independent Surveyors
Politicians
Solicitors
Estate Agents
Conveyancers
These Professional have in the past created untold hardship and misery to leaseholders. Have Freeholders finally ridden to the rescue, committing to free existing leaseholders trapped in onerous deals, I do not think so.
The Communities Secretary, James Brokenshire MP, and Housing Minister Heather Wheeler have both said:
They want to end the Excessive Exploitation of Leaseholders and to have a Leasehold system where people are able to challenge exorbitant rates and high service charges.
Will these two Ministers prevent the burden of legal fees – potentially running into tens of thousands of pounds and is preventing people from seeking justice. Will it stop leaseholders from picking up the tab for unjustified legal costs?
Lease with 10yr doubler £92k
Lease with 10yr RPI £9.5k
£92k – £9.5k = £82.5k
Therefore each lease amended by freeholders, as per the government backed pledge, transfers £82,500 of value away from the freeholder and to the leaseholder for no cost. This is not to mention the fact that the property is also then more saleable and mortgageable
If there are 12,000 of these leases in existence then we are looking at a transfer of value in excess of £1,000,000,000 (ONE BILLION POUNDS), possibly more as the above example uses a £160k prop when most are worth a lot more
On the basis this pledge is live then the whole thinly veiled “look at my business” article is entirely misleading as there wouldn’t be the need to enfranchise doublers as they would be converted
Any compensation should be based purely on what the freeholder paid for the freeholds and not on any potential future profits.. And remember it is not just the ground rents that are the issue it is all the shady corrupt practices the freeholding companies are so adept at such as extortionate charges for permissions, arranging insurance etc that need to be got rid of with no compensation.
Michael if as you say any compensation should be based on what the Freeholder paid for the freeholds and not on any potential future profits, and all shady corrupt practices Freeholding Companies are so adept at.
We were offered our Freeholds when Mercian Developments offered us, 28 Leaseholders, The Right of First Refusal (S5) which was in total circa £33,000 for a development Insured for £2.5 million pounds. Only 7 residents supported us purchasing the Freeholds, each Freehold was less than £1,200.
And yet, Stephen would be arguing that compensation based on capital rates would be many times that figure?
In 2015 we could have purchased our Freehold for £1,200 for a flat worth £120k, now to request a Lease Extension we need to pay £120 just to apply and I have worked out the Lease Extension will cost circa £13k, for a 90-year extension.
So how would your formula deal with the situation where the freeholder is the initial developer . What he paid for the freehold would bear no relation to the ground rent income stream
Matters not a jot? any compensation would be purely based on what was paid initially for the freehold.. Income steam .has been artificially created and should be done away with..And if that means some offshore spivs and pension funds lose out, Tough! What they lose out on will end up in homeowners pockets, where it always should have been..
What is artificial about a term in the lease where you covenant/promise to pay a defined sum each year. The term is shown clearly in the lease for all to see. The lessee being represented by surveyors and solicitors in the acquisition
It is clear from the lease that service charges are used to maintain the building and ground rent a profit stream to the freeholder
It is the failure to appreciate the value of that obligation that is the root of he discontent. That is why I believe that the NPV of the rent should be shown next to the premium using a defined discount rate
Oh Stephen, for goodness sake give it a rest!!!
Our ground rent is a measly £20 year, very affordable BUT our service charges were ‘undefined’ sums each year and yes the lease says these charges are to maintain the building. Unfortunately our managing agent DID NOT ” appreciate the value of that obligation” and failed miserably to maintain the building!! Any work that was carried out was usually shoddy and we were charged extra on top of the service charge.
Having gone RTM since 2010 the building IS NOW maintained properly within the service charge budget.
We still pay £20 year ground rent but the cost to extend the lease would now be around £3o,ooo as against £2,000 if purchased after 2yrs living here. WE WERE NOT TOLD THIS AT THE TIME OF PURCHASE!!
Nice sales pitch.
#leaseholdmartyr
So Stephen, what pray of those freeholders that appoint connected companies as managing agents who then impose excessive charges often for little or no work and find “inventive” means of passing back those profits to the freeholders?
The thread is about ground rent terms and whether an RPI linked ground rent is better or worse than one that doubles every 10 years .
This thread was started by Michael Epstein.
A different thread was about ground rent vs RPI.
The article mentioned a lot more about capitalisation rate.
Lesley
So presumably the problem you have encountered is that the term of the lease was not understood on purchase. If the rent is £20 per annum and you are being quoted £30,000 for a lease extension the term of your lease must be quite low?
Yes Stephen our lease is very low but infact it only had 63 years remaining when we bought it in 1999, well below the 80 years now seen as critical.
No mention was made of the urgency to extend only that we could do so after 2 years. I asked what happens if the lease runs out and was told the property reverts to the freeholder but you can remain living in it as an assured tenant! We were also told it would probably be unmortgageable at 50 years ( now 70 years it seems? ).
As we had lived in a leasehold house with the same ground rent prior to the flat and had bought the freehold to this for £2,000 we were not overly concerned. However only in recent years has it come to light the cost of extending the lease increases dramatically as the years fall.
It obviously would have been a no brainer to extend at £2,000 had we been informed!!
The LEASE website has a free guide to valuation for statutory 90 years lease extension,
For a lease with 68 years unexpired and a long lease valued at £165K , the cost of extension came to £10,700, But after adding on freeholder’s legal costs and valuation fees etc and your own legal costs and surveyors fee, £20K total cost should not be a surprise.
Its up to the 4 million leaseholders in E & W to make their complaints to their local MP and get the leasehold laws changed and to make commonhold property cheaper to buy than leasehold property.
Excellent article. Quite amusing how Stephen defends the GR income stream no matter what. Bless.
Wonder how the ‘pledge’ ensures the awful tribunal system operates in the real world and not in a world that favours freeholders? Assuming that is that leaseholders could afford the legal costs to apply.
We once went to LVT. The tribunal was miffed we dared to argue that the accrual accounts were wrong and gave the LL his costs for this reason, claiming the lease allowed this, but stated no lease clause.
When we became an RTM we were advised the only LL costs available per the lease were in contemplation of forfeiture or express indemnity clauses. Nothing about paying the LL’s costs for defending against unfair charges.
I think it’s long overdue folks accept this government will never reform leasehold. It will talk a good talk, mind. Make promises.
Helps to win elections, that caper.
I heard the current Housing Minister in parliament Monday joke that his post normally lasts nine months. Said he was overdue!
Housing ministry is the Seagull Department: fly in, make a lot of noise, talk cr*p, and fly off.