Embargo 00.01 March 28 2018
The government and panicky leasehold monetisers have cobbled together a sort of “code of practice” or good behaviour pledge – mainly in response to the Communities Select Committee’s thoroughly researched assault on leasehold practices published earlier this month.
Forty developers and freeholders have pledged to free the 12,000 leaseholders trapped in doubling ground rents by … er … varying their leases to lease-term RPI.
This is what some house builders – Taylor Wimpey (£130 million set aside, remember?) and Countryside Properties plc – have been doing since 2017.
And some ground rent speculators have been happy to oblige: RPI linked ground rents throughout the lease term is a rather more remunerative prospect than doubling ground rents in the first 50 years only.
APPG July 11: Taylor Wimpey deserves no praise for its cheating RPI ground rent relief scheme, says leasehold house customer
We reckon there are around 12,000 new leases with doubling ground rents, and another 88,000 where the ground rents are above 0.1% and unmortgagable.
The MHCLG press release does not have anything to say about that.
Pledge to help homeowners trapped by onerous leases
More than 40 property developers and freeholders have signed a government-backed pledge to help homeowners stuck with “toxic leases” that make properties almost impossible to sell.The signatories have committed to change the terms of leases for those with onerous “doubling clauses” in which ground r
But developers and freeholders have pledged to act fairly, having previously told the Communities Select Committee that everything in leasehold smelled of roses and leaseholders were exaggerating the problems.
Here is Richard Silva, of William Waldorf Astor’s Long Harbour ground rent:
“This pledge is a crucial first step towards positive change in the residential leasehold market and it reflects our commitment to eliminating bad practice from the market.”
With stuff about transparency also making an appearance … just what is transparent about Long Harbour’s £1.4 billion of freeholds being owned by companies where the beneficial ownership is hidden behind nominee directors and often based offshore?
The government press release also references high legal costs in the property tribunal, which it would like to stop.
With even the otherwise estimable Wellcome Trust running up £114,000 in legal fees to get back £6,000 off a troublesome leaseholder, it seems that even the most saintly freeholder cannot resist using the powers open to them in leasehold law.
Wellcome Trust spends £114,000 on lawyers to defeat Onslow Square leaseholder in £6,000 dispute
And what is one to make of this incoherent statement on retirement event fees:
“… families will be better protected across the retirement sector from unfair fees – sometimes called ‘event fees’ – charged in some leasehold retirement properties, where owners are required to pay extra charges when they become ill or die.”
The right at the bottom of the statement the government says it will accept the Law Commission report on event fees.
Of which, we were critical:
Law Commission: you will create an investment asset class, not protections for pensioners – Better Retirement Housing
Martin Boyd replies to Stephen Lewis, of the Law Commission, on his report into retirement housing event fees We are a tiny charity that you kindly credit as being one of the key drivers in initiating your work with event fee project. Unlike others we were not part of your advisory panel, but we have …
It appears the National Leasehold Campaign did not warm to the pledge announcement either:
BROKENSHIRE ANNOUNCES INDUSTRY PLEDGE TO CRACK DOWN ON TOXIC LEASEHOLD DEALS
Leading property developers and freeholders including Taylor Wimpey and Barratt Homes sign government-backed pledge committing to free existing leaseholders trapped in onerous deals
Plans to close the legal loopholes that force leaseholders to pay unjustified legal fees – saving tenants thousands of pounds
Reforms to make retirement property fees more transparent – protecting vulnerable older people and their families
A new industry pledge to stop leaseholders being trapped in unfair and costly deals has been unveiled by the Communities Secretary, Rt Hon James Brokenshire MP, today (28 March).
More than forty leading property developers and freeholders, including big names such as Taylor Wimpey and Barratt Homes – have already signed the government-backed pledge, which commits them to doing away with onerous ‘doubling clauses’ that can result in ground rents soaring exponentially over a short period of time.
The freeholders who have signed have committed to changing the terms of leases for those who are affected. Other industry bodies such as managing agents have also put their names down, vowing to act fairly and transparently in their dealings with leaseholders.
Ministers have also today announced plans to close the legal loopholes that force leaseholders to pay unjustified when they take their freeholders to court over pernicious service charges. This includes consultation with industry on whether these changes should apply to existing leases too.
Under current rules, leaseholders who wish to take their landlords to court to challenge exorbitant fees or unfair hikes in annual charges also run the risk of being forced to pay their landlord’s legal fees. This applies even if the court rules in their favour – hitting some tenants with bills of tens of thousands of pounds.
Scrapping this loophole will reset the relationship between freeholders and leaseholders – stopping tenants being unfairly burdened with legal fees and ensuring they can access justice.
The Communities Secretary, Rt Hon 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.
“The new industry pledge – signed by leading freeholders and property developers – will further support existing and future leaseholders by protecting them from onerous fees. It’s great news that leading names such as Taylor Wimpey and Barratt Developments have already signed up to the pledge, and I want to see others who have not yet signed up do the right thing.”
Housing Minister Heather Wheeler MP said:
“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.”
Richard Silva, Executive Director of Long Harbour said:
“This pledge is a crucial first step towards positive change in the residential leasehold market and it reflects our commitment to eliminating bad practice from the market.”
And to further protect leaseholders from excessive costs, older people and their families will be better protected across the retirement sector from unfair fees – sometimes called ‘event fees’ – charged in some leasehold retirement properties, where owners are required to pay extra charges when they become ill or die.
The measures announced today will stop older homeowners and their families being hit with surprise fees when they may least expect or be able to afford it, often when they are at their most vulnerable, such as following the illness or death of a loved one.
This is part of ongoing action by the government to reform and modernise the home-buying process and crack down on unfair practices in the leasehold market – helping to create a housing market that works for everyone.
Notes for Editors
Stewart Baseley, Executive Chairman of the Home Builders Federation, said:
“The home building industry is committed to ensuring that leasehold is used appropriately and remains a safe and secure tenure for homeowners.
“This pledge is a further demonstration of the industry’s intent to provide homebuyers with clarity, transparency and security ensuring that when used, the terms and conditions of leases are fair and proportionate.”
Options are being explored to close the legal loophole and Ministers will announce next steps in due course. This includes consultation with industry on how whether these changes could should apply to existing leases too. We will also raise awareness for how leaseholders can avoid paying their landlords legal fees through current legislation.
Pledge signatories include:
Association of Residential Managing Agents (ARMA)
Aviva Investors Global Services Limited
Consensus Business Group
Croudace Homes Group
E & J Estates
Estates & Management Limited
Fairview New Homes
Ground Rents Income Fund Plc
Home Builders Federation (HBF)
Homeground Management Ltd
Long Harbour Ltd
Mainstay Group Limited
McCarthy and Stone
Mears New Homes
Millgate Developments (part of the Countryside Group)
Nicholas King Homes
PGIM Real Estate
Royal Institution of Chartered Surveyors (RICS)
Spitfire Bespoke Homes
St. Modwen Homes
Stewart Milne Group
Wallace Partnership Group Limited
The government has today announced its response to the Law Commission’s report on event fees. The majority of the recommendations have been accepted which include:
A new statutory code of practice which will ensure that these fees cannot be charged unexpectedly, while fees that breach it will be regarded as unenforceable.
Developers and estate agents will be required to make all such fees crystal clear to people before they buy, so prospective buyers can make an informed decision before forming a financial or emotional attachment to a property.
I cannot understand why a flat with a ground rent greater than 0.1% of the market value should be considered such a risk to a lender to the extent that it is not worthy of being given a mortgage
So if the rent is £500 per annum and the flat worth £300k the rent exceeds their criteria by £200 per annum . It is simply staggering that such a sum makes it unmortgagable – 55 pence per day . A near hysteria has broken out . The ten year doubles are a different matter but a rent of £500 per annum rising in line with inflation is hardly a problem . I can see that the value of the flat will be a bit less because the lessee will have to pay £200 per annum more than normal so perhaps a reduction in the value of the flat of around £6000 so the amount borrowed on a mortgage will be around £6000 less resulting in around £200 less in mortgage repayments to offset the higher ground rent .
So as a ground rent rises a flats value will start to fall – but a lender should not be concerned provided the value of the flat takes into account the rent payable . And this as I have said time and time again can be easily achieved by having the NPV of the rent shown next to the premium in the prescribed clauses of the lease – box LR7
Two years ago a £300k flat with a ground rent of £400 rising say every 25 years would be acceptable . The concerns of lenders has now, we are told, resulted in such a rent making the flat unmortgageable and making its sale prospects slim so it’s value collapses . This does not help anyone and the lender shoots themselves in the foot undermining the very security they lend on
How a ground rent rises can blight a property sale prospects – a high ground rent will result in a reduction in he asking price of flat but should not render it valueless
Perhaps a more measured response should be a study to see how a ground rent effects it’s value depending on its size and review pattern so lenders can factor the risk and valuers adjust the value
What is the justification for ground rents ???
Part of the consideration for the purchase
A flat is offered for sale for a premium of £x plus the obligation to pay say £300 per annum by way of ground rent
The ground rent gives no benefit to the lessee as the freeholder does not have to use it towards the building. It is a burden and needs to be considered when purchasing the flat . The bigger the rent the Moreno the premium needs to be reduced to take into account the negative nature of such a commitment
This is why the NPV of the rent need to be shown next to the premium using a defined discount rate set by the government
If a ground rent was set at £3000 then it most certainly would be considered carefully and a purchaser would probably look to see a reduction of £80k off the price of the flat . The freeholder gets less but in return gets a marketable security
The lessee pays less for the property but the saving in mortgage interest would be offset by the higher ground rent
So nobody should be disadvantaged provided the matter is oonsidered carefully at the point of sale
At orenst small rents are not given any thought and that is where unscrupulous clauses can be slipped in
My proposal that the NPV of the rent should be clearly set out in the lease would ensure rents that double every 10 years would not slip in
I prefer to follow best practice across the world. If leasehold is fairer on society than commonhold let us know on here. Cheers.
Katie, we were informed some time ago that Ground Rent was originally a way of maintaining contact for contractural purposes only, that is why it was known as a Pepparcorn Rent.
Now greedy Freeholders/landlords/Builders have seen the steady stream of income paid by Leaseholders. This gives greater value to the Landowners over the length of the lease.
Take our small development of 29 flats, we each pay Ground Rent of £48per annum for the first 33 years, then it doubles and doubles again, making a total of £321,552.00.
Imagine the total if the Ground Rents began at £250 for the first 33 then doubles and doubles again, this would be £1,674,750.00 for nothing.
I suspect the reason why flats with ground rent are difficult to mortgage, is because they are difficult to resell. The purchaser has no way of telling if the price has been reduced because a ground rent is attached.
Who would purchase anything (for example a car) if there is an annual extra charge attached for absolutely no reason at all.
No purchaser wishes to pay an extra charge for legalised robbery.
Ground rent is for nothing at all, Commonhold works everywhere else. Leasehold just benefits the parasites who wish to continue with their ill gotten gains.
Stephen Tchenguiz probably thinks we should all have archery practice on Sundays too.
It’s really quite simple.
1. Ban leasehold on houses
2. Convert Leasehol flats to commonhold where possible.
3. Make it easier to buy your freehold and of course cheaper.
4. Build no more leasehold which will phase out the greed.
Over the years with law changes and no more leasehold properties built it will self abolish.
I’m afraid greed and awareness of scams such as selling freeholds behind new home owners has awoken the beast which is the public and we don’t won’t an abusive system any longer.
I was sold a leasehold house but told I could buy my freehold after 2 years. My freehold was sold to an investor 2 months later without telling me. The law says I had no right of first refusal but yet it could be sold to a 3rd party within 2 months. You can’t go off good faith! Laws and regulations need and must be brought in and when mis-selling comes into it we need compensating as well.
In summary, the developers and everyone else milking the public has to stop and that means abolishing leasehold. It isn’t fit for modern society.
In a sense Richard Silva of Long Harbour is correct when he says “It reflects our commitment to eliminating bad practice from the market”.
They do not have any such commitment but hope giving a little will silence the victims.
It is akin to having a major oil leak and topping up the engine without fixing the fault.
So the solution they have come up with is to convert to RPI at a time when all others are converting to the cheaper CPI.
Of course, the ground rents are but a part of the problem. By owning the freeholds, they can appoint themselves as managing agents. They decide on works and which contractors they use.
They place the insurance with huge undeclared insurance commissions. They impose eye watering administration charges for permissions or late payments. And should anyone dare to challenge them they will charge weaponised legal fees that will ruin any leaseholder. They will use any vague excuse however tenuous to thwart any right to manage action.
If all this was not enough , they have the right to take back any property for relatively trivial disputes and keep hold of the entire asset.
Even as Barratt’s were signing this pledge, they were in the process of selling off their London residential property management company to Firstport.
That’s right, One of the most controversial property management companies in the UK, that not only admitted criminal price fixing targeting vulnerable pensioners, paid out a record fine for breaches of health & safety legislation that resulted in a fatal fire, and that have been roundly castigated in the media and in Parliament were thought suitable by Barratt’s to pass 11,000 of their residents into the Firstport clutches.
My upstairs neighbour extended their lease informally and pays £450 per annum. I extended under the 1993 act and have a peppercorn rent, however I paid £9500 for the privilege. Our flats are not worth £300k like the example Stephen gave, but around £60000 if we are lucky. There are no winners, other than the greedy freeholders. . The solicitor when asked if a high ground rent would put potential buyers off said no it is just another bill to pay. But a bill for what, absolutely nothing. Disgusting.
Countryside Properties, Taylor Wimpey etc are still taking Help to Buy money to sell flats with ground rents increasing by RPI every 10 years over a 250 year period. Do the maths on inflation at 5%pa over 250 years.. It’s scary but a nice little earner for professional investors who leech off leaseholders.
Many existing new build flats still have ground rents doubling over 15 years which is 7% pa. If inflation exceeds 7% as happened in the 1980s leaseholders will be even worse off with the government approved GR increase at RPI because there is no cap on ground rent.
Ground rent for existing leaseholders needs abolition so ordinary folk can enjoy their homes without being endlessly harassed for money for nothing.
Legislation is the only answer.
As LKP says, RPI increments for the whole term are not automatically a better deal than ten year fixed doubling for first fifty years.
1. Lease 99 years. £100 GR doubling every ten years for 50 years then constant.
Assume yield 5%.
Net present value: £11,139
Total paid in term: £187,800
2. Lease 99 years. £100 GR increasing every ten years for whole term at RPI.
Assume average RPI 3% pa:
Net present value: £3,758
Total paid: £51,544
If RPI average = 5.5% pa:
Net present value: £9,557
Total paid: £284,831
If RPI average = 7% pa:
Net present value: £20,482
Total paid: £852,043
Do you feel lucky about inflation?
The average RPI since 1960, I think, was 5.5% pa? But I have a very old calculator with an eejit using it.
Of course, a guaranteed return on an investment (already recouped in full at market value when lease first sold) is quite nice for the freeholder. English leasehold is very generous that way.
Long leases in the real world do not devalue per the relativity graphs. They can crash and burn. This means that a guaranteed hike in GR, by whatever method, will inevitably render a shortening lease impossible to mortgage simply on the 0.1% rule.
Real world evidence tells me that in the last few years even extending a lease does not guarantee a higher sale price than leaving it at as low as 65 years. Crazy but true it seems.
Seems the housing market now sees leasehold as pretty toxic?
Thank you Government for making a whole lot of noise but doing nothing at all legislatively. A Law Commission report or two are just bundles of typescript.
If inflation was to run at 5% per annum this would be around 3% higher than what the markets believe the long term inflation rate to be so the discount. Rate used to value an income stream would increase to probably around 9% which would lower the NPV from the figures you have calculated
If a rent is to be protected from inflation it is probably better that the rent is linked to average earnings to ensure that the rent does not become a burden . It is possibly that with increasing automation in the work place that many modest paid jobs will go and wages may lag behind inflation – so rents linked to inflation may become a burdensome
Inevitably increasing unemployment and job insecurity will bring house prices down
These issues are far more daminging to people’s lives than whether a ground rent is £400 a year or £250
Mind you I have predicted nine of the last three downturns in the property market