DCLG Consultation Paper On Leasehold And Ground Rents – Statement – McCarthy & Stone
See our response to the DCLG consultation paper on Leasehold and Ground Rents
It is a fair bet that McCarthy and Stone will be making a strong submission to the DCLG into the leasehold houses and ground rent scandals firmly urging ground rents to stay.
Ground rents are for no service whatsoever, although McCarthy and Stone argues differently.
It charges £400-£500, and £500-£600, within the M25, which are extremely high for relatively small apartments.
At Neo Bankside, beside the Thames in central London where flats sell for up to £8 million, ground rents are only £800 a year.
“The slight increase compared to open market prices reflects the larger size of our retirement developments as our schemes include significant shared facilities such as the lounge, the laundry, the guest suite, staff areas, and, in some developments a dining room, restaurant and mobility scooter room.
“Once the additional space and facilities in a retirement development are factored in, our ground rents are broadly comparable, and they are also in line with those charged by other retirement developers.”
In fact, ground rents have nothing whatsoever to do with these facilities: they are simply a charge developers make and are as high as developers think they can get away with. It is the case, other retirement developers load ground rents as well, however.
McCarthy and Stone makes 4 per cent of its income from selling freeholds, which attract higher prices depending on the lease terms.
4% of McCarthy and Stone earnings come from ground rents – Better Retirement Housing
Please follow and like us:The announcement yesterday by Sajid Javid, Communities Secretary, that he is to ban the sale of leasehold houses and reduce ground rents on new properties to “as low as” zero resulted from months of work by the Leasehold Knowledge Partnership. It will have a marked effect on McCarthy and Stone, according …
Ground rents rise every 15 years “linked to either the movement in the Retail Price Index (RPI) since the last review, or if greater, by 2% per annum”.
McCarthy and Stone’s press statement says: “Leasehold is a common and widely accepted form of tenure for apartment living and has traditionally been used as an efficient way of managing apartment blocks and managed estates that contain a number of residents on the same site, often with competing voices.
“With best practice and proper guidance in place, it can work well, and has done for a number of years, and the vast majority of apartments are on fair terms.”
BetterRetirementHousing.com doubts whether two Office of Fair Trading investigations into retirement housing quite falls into “best practice and proper guidance”.
One OFT inquiry in 2012 was into the exit fees on sale introduced into leases as a money earner by McCarthy and Stone, which the company subsequently dropped.
The other OFT investigation found that 65 retirement sites across the country had been systematically cheated by management firm Peverel, now FirstPort, and it subsidiary Cirrus.
McCarthy and Stone sold its old freehold book to the interests of Vincent Tchenguiz, or rather his so-called Tchenguiz Family Trust based in the British Virgin Islands.
Until his arrest on wrong evidence in March 2011, Vincent Tchenguiz also owned Peverel.
Peverel / FirstPort owes its rise to fortune and public note owing to its management of the old McCarthy and Stone freeholds.
Mindful of the reputational catastrophe that ensued, McCarthy and Stone now manages its freeholds itself. Indeed, it has created headleases, so that its management arm manages the sites even after the freeholds have been sold on.
Michael Hollsnds
M&S may be correct in saying that their Ground Rents are in line with other Reitement Complex Developers, but can they please inform us what they are for.
However nice their apartments are, If they are a making a charge for providing no service whatsoever it must be considered to be downright robbery.
As are Exit Fees which after criticism from the OFT, M&S discarded.
Let’s hope this latest Consultation will come to the same conclusion on Ground Rent and again M&S will take the correct action.
As for M&S saying the Leasehold system is working well, maybe those now managed by M&S themselves are OK but they are very expensive when purchased new.
This is not the case with many of the older M&S complexes of the older complexes, which have been badly managed, residents stung and with 99 year leases running well down. Many are very difficult or impossible to sell so becoming a massive burden to unfortunate inheritors.
Paddy
Speaking generally and not specific to any freeholder, can it even be possible that the DCLG would believe that ground rents pay for facilities or services?
Perhaps DCLG might ask for evidence of any claims of ground rent income and other ‘yield’ being ploughed back into renewing kit and services?
I may be wrong, but the market price of a lease in a retirement complex factors in any amenities provided?
I may also be wrong, but I’d imagine leaseholders of retirement apartments enjoying such facilities have either high service charges for the benefit, or a built-in sting in the tail when it comes to sale?
The term ‘ground’ has been torn from ‘rent’.
As for ‘best practice’ and ‘proper guidance’ in leasehold, this old canard has been dished up, sadly successfully, to policy makers for years as reason not to legislate.
‘Best practice’ and ‘proper guidance’ has served nobody but the industry. Almost all the guidance is advisory, full of ‘shoulds’, and I’ve personally seen little evidence in many years of best practice.
But I have yet to experience a retirement home. I fear after years in leasehold already, I may not know my own name by that stage.
Michael Epstein
If it is the position of McCarthy & Stone that the ground rents pay for services and facilities, then perhaps ground rents could be considered by the tribunal to be part of an administrative/service charge (in which case it would be open to challenge at a tribunal?)
Paddy
I have put ground rent capitalisation to music:
https://www.youtube.com/watch?v=Hg9QLwxHErE
The sorted list (low to high onerosity (?)) is at the end.
Stephen
Surely the answer is to have the rents rise in line with average earnings – in that way the rent can never become onerous to the lessee and to the landlord the rent is never destroyed as has been the case in the past by inflation
Ground rents in the early twentieth century were by today’s standards low because they were often say £5 but of course £5 was a decent wage back then – so it is incorrect to say that ground rents have risen substantially over the years – they have caught up with what used to be charged in real terms
The introduction of doubling rents took hold in the 1970’s when inflation was rife. Doubling every 35/33 yes etc are mere guesses as to inflation and indexing is far better as recommended by the Nationwide – To allay fears that if incomes don’t keep pace with inflation which is a possibility in out increasingly automated world where real jobs will disappear linking to average incomes would be better
Paddy
I see the attractiveness of the ‘fairness’, but just don’t accept ground rents should track RPI (a) because house prices (and flats) usually beat RPI out of court, and (b) the freeholder’s reversion is always increasing more than house price inflation because the lease depreciates.
The freeholder has no argument I can see to demand inflation-proofed ground rent on top. That’s just greedy.
My other problem with a lease that allows the landlord to decide the GR increment at ‘review’, is the disconnect between published rates and local experience. In our case, our sales values dived way below local flat sales after the 2008 crash. If RPI indexing had been built-in, which outcome would have applied at GR review? Real or theory? Luckily I have a built-in increment.
How is a GR RPI review decided/disputed? Not yet another court application? I read this on the Allsop blog:-
Regarding maximising {freeholder’s} investment:-
“…how good that opportunity is for the landlord is set at the start of the lease, by the legal wording contained in the rent review clause, drafted by a solicitor.”
“This is because the assumptions contained in the rent review clause can over-ride the principle provisions of the lease. ”
“{rent review surveyor} can advise on what the clause needs to achieve in rental terms – namely the creation of a favourable negotiating position for the landlord at future rent reviews. In fact it goes further than that, it can also affect the renewal lease on expiry where the rent review clause is generally imported from the old lease.”
Given leasehold, who needs arguments every rent review? Who holds the power?
Freeholders can bank theories. Leaseholders can only bank reality. (Might use that line again).
Michael Loveridge
“… the freeholder’s reversion is always increasing more than house price inflation because the lease depreciates..
The freeholder has no argument I can see to demand inflation-proofed ground rent on top. That’s just greedy.”
That’s simply not the case with leasehold houses, which is what we’re talking about. Because the typical lease is 999 years any depreciation is so tiny that there is no link at all between the value of the house and the value of the reversion, at least until the last 80 years or so, by which time the world will probably have ended anyway!
The value of the reversion is nearly all determined by the income it produces and current interest rates. So if you have a ground rent of £100 and ultra low interest rates, as at present, the value will be high. People consider a return of 2.5% good, so would pay £4,000 for it. But if we go back to `normal’ interest rates of, say, 5% the value might drop to just £2,000 to deliver a 5% return.
Stephen wasn’t suggesting that the landlord could decide the GR increment. A link to average earnings is similar to RPI, in that it is determined by an entirely independent mechanism.
“If RPI indexing had been built-in, which outcome would have applied at GR review? Real or theory?”
The RPI is determined by the Government each month – there is no such thing as a `real’ one or a `theoretical’ one. Consequently there can be no dispute about the figure.
Finally, the excerpt from the Allsop blog is referring to market rents in commercial leases, which are completely different to ground rents in residential leases. Because of the small amounts involved in even the highest ground rents it would never make sense to have a review mechanism that was open to argument, and no such review mechanisms exist as far as I know.