Negotiating with freeholders to get an informal lease extension deal is utter madness for most leaseholders. You can trash the value of your flat with a bargain offer that seems too good to refuse … and for lawyers a quick deal is easy money, with no repercussions (for them).
Louie Burns, of Leasehold Solutions, distils years of experience to provide this grim warning for innocents who think they are playing in a straight game
This is an in-depth look at the real implications of accepting a non-statutory or informal lease extension from your freeholder.
I apologise that some of this information is complicated and may be difficult to follow, but please bear with me: your freeholder will be relying on the likelihood that you won’t understand it. Make sure you prove them wrong!
Non-statutory or informal lease extensions are offered by freeholders when you wish to extend your lease. They are designed, at first glance, to make it look like you are getting a deal!
Nothing could be further from the truth …
I call these informal offers ‘Trojan horse offers’. Just like the wooden horse left behind at Troy by the ancient Greeks, it looks like a gift … but when you look inside, the details can be catastrophic.
In my opinion, this is a fair analogy of a freeholder’s informal offer. Let’s see why.
You decide to extend your lease. If you have owned your flat for two or more years, then you have a legal right to extend your lease by 90 years and reduce the ground rent to zero. The law states that, when you extend your lease (or purchase your freehold), you must compensate your freeholder three different ways:
1 Ground Rent
This is the total amount of ground rent you owe your freeholder for the remaining years of your lease, but calculated in today’s money.
2 Reversion
This is the amount you would have to give your freeholder as a lump sum, so they could invest for the remaining years of your lease (with an equivalent compound interest rate of, say, 5%), that would be worth the value of your flat – with a long lease – today);
3 Marriage Value
This only applies if your lease has fallen below 80 years. If you extend your lease, the value of your flat will rise. The rise in value must be calculated and the total ground rent and reversion due are then subtracted.
Whatever is left is split 50/50 between you and your freeholder.
Here I use actual figures from a recent transaction in which I was involved as a way of clearly demonstrating the real implications of accepting an informal lease extension.
The details of the informal are also real, presented by a large – and in my opinion – immoral, London-based freeholder.
My example is a nice flat in London
• The value of the flat with a long lease of 99 years: £230,000;
• Ground rent of £75.00 per year, doubling every 33 years;
• Current lease length 75 years.The valuer recommends the following:
• Ground rent total: £2,143
• Reversion total: £5,849
• Marriage value total: £1,754Total for lease extension: £9,746
Plus total fees of £3,500TOTAL PRICE £13,250
If you were to extend your lease using your statutory legal right, the lease would then be 165 years with zero ground rent. It would be 85 years before the lease would need extending again, and even then it would be very cheap as there would no longer be a ground rent element to include within the calculation.
The lease length issues of the flat will have been rectified once and for all, and there would be no future value in the flat for your freeholder.
But your freeholder is more than likely to be a ‘professional’ freeholder. Such freeholders buy the freehold of buildings to make as much money as they possibly can from each leasehold flat within it.
They make money in the following ways:
• From immoral licensing fees hidden in the terms of the lease;
• By claiming a commissions they get back from building insurance, which, of course, there is no option but to pay;
• From inflated service charge fees;
• From ground rent paid each year;
• The money you have to pay them for a lease extension.
Extending your lease is the big pay day for freeholders!
If they can fool you into accepting an informal lease extension, it will turn into tens of thousands of pounds for them. If, however, you extend your lease by an additional 90 years and reduce the ground rent to zero, this basically wipes out all the future profit they will receive from your flat.
They really do not want you to do this. They want you to accept their ‘Trojan horse’ informal lease extension deal.
What does an informal lease extension look like?
I would like to state, emphatically, that you do NOT have a legal right to an informal lease extension. Please bear this in mind, as I will return to this many times.
There is another way you can extend your lease and that is by contacting your freeholder directly. Often they will contact you as soon as they are aware of your desire to extend your lease.
Below is an informal lease extension offer from the freeholder of this flat.
Dear Mr and Mrs Naïve
We are happy to offer to extend your lease back up to 99 years for the inclusive price of £10,200 and our total legal and valuation fees will be an additional £1,000 pus VAT.
The ground rent will be £250 a year, doubling every 10 years.
We are not looking to amend your lease in any way, we will only modernise the terms of your lease. We are able to complete this process in two months.
This offer is valid for thirty days from the date on this letter.
Wow! It appears that the freeholder is a nice guy after all!
The total price they are offering is £10,200 plus fees of £1,200 (Total £11,400) saving you £1,850 to extend your lease back up to 99 years!
Ground rent is just £5 per week and they only want to modernise the terms of your lease!
They will complete this whole thing in just three months (instead of 12 months minimum it would take to extend using your statutory rights).
“This is brilliant. Where do I sign?”
STOP!
That’s why I call these informal lease extension offers a Trojan Horse, because the devil is in the detail.
Let’s examine this offer more closely.
The freeholder generally offers to extend your lease back up to 99 years and this seems like more than enough for most flat owners.
However, there is a very real reason freeholders only offer an extension back up to 99 years and that’s because in 17 years or so, someone is going to have to extend the lease of the flat again – which means that the freeholder gets paid to extend the lease again (and again, and again …).
This would not happen if the lease had been extended by the statutory route.
As I will explain later, the details of this informal offer mean that whoever is unfortunate enough to own this flat when the lease needs extending again in 17 years is going to have to pay an absolute fortune for the privilege.
Beware of another freeholder trick.
You may be offered a 125-year lease extension. This might seem like it could be a much better deal for the flat owner, but what they omit to mention is that the 125-year extension starts from when the lease was originally granted.
This does NOT mean a 74-year lease has been extended up to 125 years!
If you are unhappy with this, you have no legal recourse to argue with your freeholder. You do not have a legal right for an informal lease extension – it is a take it or leave it deal.
[LKP has been provided with an example of a young couple who extended their lease in a private informal deal with the landlord, and found that because the extension had been back dated to 1961, they had one year less on the lease than they would have done had they not extended. This is so blatant even the criminal authorities may have to act.]
The future implications of ground rent
£250 a year doubling every ten years does not sound like a lot of money … but it is!
A ground rent schedule like this is considered an onerous ground rent schedule, which could easily affect the future sale sale-ability and value of the flat. This is because the freeholder is going to make money two different ways from this increased ground rent.
Firstly, the extra ground rent they will get before someone extends the lease on the flat again.
If the ground rent is £250 per year, then the freeholder will make £2,500 more than he would have done had the flat owner not used their statutory rights for the next ten years. Then it doubles, then doubles again and again.
That’s not the big money for the freeholder, though.
The big money comes from the fact that any future owner is going to have to extend the lease on the flat again. However, instead of the ground rent being £70 a year as it is now, the ground rent will be £1,000 a year!
So, how much will the freeholder make over the next 24 years because they tricked the flat owner into accepting an informal offer?
• Cost of the lease extension = £10,400
• Legal fees = £1,200
• 10 years @ £250 ground rent = £2,500
• 10 years @ £500 ground rent = £5,000
• 6 years @ £1,000 ground rent = £6,000
• Cost of the lease extension = £76,500
• Plus legal fees @ £2,000 =£2,000Total received by the freeholder over 24 years = £103,600
Compare this with the £13,250 you would have spent to extend the lease for an additional 90 years with zero ground rent forever more.
The initial saving of £1,850 the freeholder waved under your nose has turned into £90,000 profit! Not a bad business being a freeholder, is it?
Just to be very clear – when a freeholder increases the ground rent they make money in two different ways: the actual ground rent they collect each year; and the future value of a lease extension with an onerous ground rent clause.
A future freehold purchase
Another ploy by predatory freeholders is to offer an informal lease extension to flat owners when they know they are going to sell the freehold of the building.
They offer an informal lease extension and you pay them £10,200. A year later they offer to sell you the freehold of your building.
How do you calculate your share of the freehold purchase?
You have to calculate the ground rent and reversion elements I mentioned earlier, but the ground rent is now huge and doubles every ten years. You will end up paying more than £10,200 to purchase your share of the freehold!
Note: If you had extended using your statutory rights there is zero ground rent and no marriage value as your lease is 165 years, so the only calculation is reversion, but this is over 165 years.
It would cost you about £250 to buy your share of the freehold!
There are many – and significantly worse – offers you will need to be aware of with ground rent.
Here are examples of some I see every day.
Onerous Ground Rent clauses
RPI
Freeholders will often ask for £250 p.a. year rent, doubling every ten years linked to Retail Price Index (RPI). RPI is used to measure inflation and, obviously, no one knows what inflation will be in the future but one thing is for – it will cost you dearly.
Not only will your ground rent double in ten years, but someone will calculate what has happened to RPI over the last ten years and add it to your doubled ground rent!
Capital Value of flat
Freeholders will often ask for £250 a year rent, doubling every ten years linked to 0.025% of the capital value of your flat.
After ten years, not only will your ground rent double, but also your ground rent will then be linked to the actual value of your property!
Capital Value of the estate
Some of the estates in London have ground rent doubling every 10 years linked to 0.025% of the capital value of the estate, not just your flat!
Doubling every five years
I see more and more freeholders trying to fool people into signing informal deals where the ground rent doubles every five years. This is just ridiculously onerous!
Taking any of these deals could leave you owning a flat that no one wants to buy (except, of course, your freeholder who will be happy to buy it for a knockdown price!).
I recently calculated what effect this would have on a flat with a 999-year lease in Islington. The ground rent was £250 a year doubling every 25 years.
I have calculated that for the last 25 years of the lease, the ground rent would be £165,000,000,000 per year!
It is not just the future implications of the ground rent that you need to look out for if you are considering accepting an informal offer – although that should be enough!
Let’s look at the other areas you need to be aware of.
The terms of your lease
If you extend your lease using your statutory legal right, you are protected by law and your freeholder cannot alter the existing terms of your lease.
If you take up your freeholder’s offer of an informal lease extension, you are not protected and your freeholder can make any changes they wish.
“Wait!”, I hear you cry! “In the offer letter from the freeholder they state that they will not alter any terms of my lease – they will just modernise them!”
In reality, what does the word ‘modernise’ mean?
I can tell you, categorically, that the word ‘modernise’ means whatever terms can be changed to benefit your freeholder.
It is worth pointing out here that the saving your freeholder is offering you with this informal deal comes from the fact that you will have no legal representation through this process.
They are telling you not to have a lawyer to protect your interest throughout this process, but are presenting this fact to you as if they are saving you money! Genius isn’t it?
The truth is, though, that there is no point in having a solicitor represent you in an informal deal as you do not have a legal right to it. It is a ‘take it or leave it’ offer so, even if you found something you were unhappy about, there is no legal mechanism for you to remove it.
So, which terms of the lease is the freeholder keen to change?
Put simply, anything that makes them more money and protects their position as your freeholder.
Licences
The freeholder can insert additional licences to your lease that mean you have to pay them to alter your flat, sell it, rent it out, renew the rental contract each year with your tenant, get satellite TV, turn over to your left side in bed at night, etc.
Two years ago, I spoke to a group of flat owners close to West Ham.
One chap in the audience thought I was exaggerating the issue of informal lease extension, and he went directly to the freeholder of a flat he rented out.
He ‘phoned me a few months later to say that his freeholder had added a clause in his lease, stating that he would have to pay the freeholder 10% of the rental income he receives each month, forever more. The chap wanted to know what he could do about this clause as he had signed the lease a couple of months before and the freeholder was now chasing him for the money!
Changes to some of the clauses of the lease could also have serious implications for the security of your flat, and increase the likelihood of the freeholder trying to obtain forfeiture of your flat (which they love).
They may insert a clause in your lease, which states that if you ever take them to court, for whatever reason (even if your freeholder was caught committing service charge fraud…), that the freeholder’s full legal fees can be reclaimed from you by way of the service charge.
If you sign a new lease with these terms it is now your reality and you can’t alter it.
Be very, very careful regarding the terms of a lease and remember that even if you find bad ones your freeholder has tried to insert, there is absolutely nothing you can do to remove them.
Timescales
The other area to keep an eye on is timescales. I repeat, you do not have a legal right to an informal lease extension and your freeholder can withdraw this offer whenever they want, with no legal recourse at all. Why would they do this?
There are many reasons a freeholder would withdraw an offer, but it’s always so they get more money from you.
For example, you are selling your flat and have a buyer lined up. It may all rest on this informal lease extension, but your freeholder may withdraw their offer claiming there was a mistake on the valuation and they now want £1,800 more.
Chances are you will just pay it!
Freeholders often withdraw an offer when your flat lease length is about to go below the pivotal 80-year mark. The freeholder presents what appears to be good informal offers.
Negotiations are dragged out until there is not enough time to extend your lease through the legal process. The offer is then withdrawn.
The lease has now gone below 80 years and your freeholder’s investment has risen by thousands of pounds and there is nothing you can do about it!
I have lost count of the amount of times I have heard freeholders’ solicitors bragging about doing this to flat owners. If, however, you extend your lease using your statutory rights there are strict timescales by which your freeholder must abide.
Caveat emptor … but solicitors aren’t on your side either
I am shocked by how many professionals recommend that their clients accept informal lease extension without pointing out any of the above.
The big excuse used by all those who recommend that their clients accept informal offers is, “Why are you worried about the details? Let the person who buys your flat worry! You save £1,800 that all you should care about. Caveat emptor!”
If a solicitor or valuer presents a quotation to extend your lease, they have a year-long battle with a knowing freeholder before they get their money. Obviously, if an informal lease extension offer is accepted, they get their money very quickly with little effort on their part.
This is why few professionals point out all the problems I have outlined here.
Five years ago, the argument of ‘let someone else worry about the details’ may have been true, but it’s not a fair argument today.
More and more flat owners and solicitors are looking at the details of informal lease extensions and the onerous terms inserted in the lease.
I now see so many flat sales fall through because someone has not understood the implications of the informal lease extension offered.
Banks and building societies are also beginning to understand the implications of onerous informal deals and the effect these have on the value of flats.
In the big mortgage shake up of April 2014, the Council of Mortgage Lenders brought in more stringent tests for people wishing to get mortgages and these have included looking at the details of a flat sale.
In fact, Halifax has already stated it will take a very dim view on granting a mortgage on any flat where the ground rent doubles every ten years.
What about future legislation changes, which could further highlight these informal deals and thus raise greater awareness of it?
Maybe the people buying your flat won’t understand the future implications of what you have signed up to in your informal deal with the freeholder, but is it really worth taking the chance to save a few hundred pounds in the short term?
How would it affect your future plans if you were stuck with a flat that you couldn’t sell?
Conclusion
Why shouldn’t you accept an informal lease extension from your freeholder?
• It will commit the flat to an additional and needless £100,000 spend over the next couple of decades;
• It is likely that you might have to spend a disproportionate amount to extend the lease in the future;
• It might also cost you a fortune to take part in any future freehold acquisition;
• You risk signing up your flat to lots of unsavoury new lease terms;
• You could massively damage the future resale value of your flat;
• You could end up with a flat no one will buy!
The Trojan horse offer of an informal lease extension really does contain lots of nasty details. These can have very long term repercussions for whoever is unfortunate enough to own the flat.
Most freeholders are professional freeholders and, by and large, they are not your friend.
They own the freehold of your flat for one reason and one reason only and that it to make as much money as they possibly can.
You have no reason ever to trust them, and I implore you never to do so either.
Louie Burns is the managing director of Leasehold Solutions
Related posts:
Leasehold houses have at last got the scandal of ground rents into the nation’s consciousness. But this is much worse …
Woman signs up to doubling ground rent to extend lease on £70,000 flat. Is it now sellable at all?
LEASE: we need to make a million pounds a year by 2020
The dirty tricks played with formal lease extensions
Court of Appeal to hear Mundy case which will save millions on lease extensions
The dirty tricks played with formal lease extensions
Fantastic article.
Louie Burns,
The misery your article will save leaseholders cannot be calculated. Bless you!
LKP really coming on leaps ad bounds with the quality of its reporting …
Meantime, I’m having fun extending my lease through the statutory route ‘offers’ notwithstanding all politely rejected. This is a great time for all those hangers-on – management companies, toady leaseholder directors, slimey managing agents and dodgy lawyers to cash in by blackmailing ‘tenants’ like me who stood up to them in the past. So the chickens are coming home to roost.
Question is, do I now challenge the management company’s law firm (name begins with ‘B’ and they hang out somewhere near Oxford, one of their client firms being the ex employer of our ex jail bird ex property manager …) do I challenge their s60 grab for fees of £525 +VAT at FTPT? They say they’ve been looking into my right to extend my lease.
But in truth, their client management co is using my lease extension to blackmail and extort money said to be owing on account of service charges they’ve been trying to collect since 1999 without any due sense of commitment to the regulatory – or even statutory – accounting requirements. I’ve been going on about this ad nauseam running up my own legal costs not to mention them with their fatuous empty replies also running up my solicitor’s bill.
Now at the 11th hour – nearly out of time to get the job done – a dimwit called Abi who blithely with no sense of irony or shame describes herself as our “property manager’s boss’s boss’ – has refused to arrange for a director to sign my lease. She writes:
“I do have to INSIST on full settlement of your service charge account. I do understand you have been awaiting the individual certificates for service charge accounts dating back to 1999 (sic without which service charge is neither due nor owing) on which my colleagues here at at (A … a firm of auditors in Birmingham) have been working on for you, I can inform you that those certificates are almost finalised …” She goes on to say she knows this is “a matter very close yo your heart”. And my pocket, darling… just get on with the job you are paid to do and hand over the accounts.
So – almost finalised in 2016 going back to 1999 … And Abi tells me she INSISTS on payment that is neither due nor owing ,,, and she instruct solicitors to run up my further costs under s60? Doesn’t seem FAIR to me. In fact it looks like blackmail – d’you reckon?
My solicitor advises. calmly, I can go to FTPT but warns I might run up yet further costs exceeding the managing agent’s legal fees claimed under s60. If I defend and counterclaim under equitable set-off, would it go upstairs to the High Court?
But then I’d have another problem: the blocks’ management company has gone schizo after one block (C) did RTM. The directors don’t know whether they are managing the company as a whole – or as two separate businesses. This came to light when, under CA 2006, I asked for a copy of the register of members from the company secretary (United Company Secretaries Ltd) who is unable to provide same. Why? Well, we don’t keep a register of members because, well don’t you know, ‘C’ block has RTM .. and, errm … they own their freehold, too.
Now, since I made the point that the property manager together with United Companies Secretaries may be breaking the law on this, he tells me they have take advice on this, too, presumably from the illustrious firm of B’tons near Oxford. (I haven’t heard since and wonder whether it’s time to apply to court for said register?)
So what we have here is incompetent management posturing as better than the best sliced bread, running up service charge bills getting advice from the likes of B’tons near Oxford – to advise them on leasehold matters they should – and indeed claim on their website and elsewhere – to know. I call it management by soundbites,
But is it FAIR? My hubby, in his usual down-to-earth style, suggests that B’tons s60 and all other such legal fees going back over many years should be paid NOT from service charge but deducted from the management fees charged by our illustrious managing agent (whose name begins with Wobblewoo, a county in the UK Midlands) together with their sidekick company secretarial operation – with a top up contribution from the pockets of our right-to-buy, non-resident, leaseholder directors.
Any thoughts?
Very interested in your comments Sue as we seem to be having the same problems with the same ‘B’ ? ( see my comment on previous article re: LEASE using Brady solicitors). Would be interested to talk further with you (Sebastian has my email address if you are willing?)
Hi Lesley Sebastian copied me in on an email addressed to Ray ?? in which the invites Sue to meet Lesley ….
Louie
The info, and corresponding wisdom, contained in your article ought to be of great assistance to potential buyers. I’m currently looking at alternative living accommodation for my recently widowed mother and one tends to naturally gravitate to the the retirement complex option. I have been following several websites that warn against the purchase of a ‘2nd hand’ retirement property, but this article of yours has certainly raised issues of much darker goings on within the lease agreement itself…..no wonder the the property I was considering viewing soon (for curiosity reasons primarily) looks such a bargain.
Keep up the good work and sage advice
Louie, when looking for a retirement property you will not find it easy to investigate the leasehold situation. You really need a Solicitor to help you and they are expensive. Especially if you are going to view several properties.
My experience of searching for a leasehold property goes like this.
Most I viewed were older McCarthy &Stone properties, many on 99 year leases and built up to 27 years ago. Well beyond the recommended leasehold renewal period.
Many sales agents never disclose this and I found that none of them knew if extensions had been requested or granted.
I also found that the Complex managers had no information, and the residents when I quizzed them, had not a clue what I was talking about.
I tried myself to find the cost of extending leases by asking both Peverel and the freeholder Fairhold but neither would help me.
By using the Lease Extension calculator […REDACTED] I discovered that an extension on a relatively cheap apartment could cost around £10000.
So I can see big problems looming on all these properties built in the 1980’s and 1990’s. I don’t think that the Property Managers or Freeholders go out of their way to advise the leaseholders, so eventually many leases will eventually run right down.
You’re suggesting that solicitors read leases FULLY? Routinely they do not, nor do most new leaseholders. What the software industry achieved with shrink wrap, small print and mandatory click to accept terms, the legal profession has achieved with turgid, non-transparent prose, mind-numbing length, and arcane terminology.
How fine it would be to see this stunt pulled off in leasehold: http://www.telegraph.co.uk/finance/personalfinance/borrowing/creditcards/10231556/Man-who-created-own-credit-card-sues-bank-for-not-sticking-to-terms.html
Let’s not forget the background of some the key decision makers who could effect change: http://www.thedailybeast.com/articles/2016/01/09/breaking-the-bullingdon-club-omerta-secret-lives-of-the-men-who-run-britain.html
Paul, now that is my kind of man! i love anyone that takes on the system at their own game and wins!I I remember in America, a man smoked some very expensive cigars and then claimed against his insurance policy for fire damage. he won the case in court. However, his victory was very short lived. He was promptly arrested for arson.
Since purchases using credit cards are covered by Section 75 Consumer Credit Act, What would happen if service charges were paid by credit card and then a claim for a refund was made against the card company for non supply of service?
Hi Michael
You are right, it is much tougher on retirement flats to find out the information that would allow you to make the right decision when buying a retirement flat.
There are a couple of things you can do to help your research though which are also relatively cheap too.
You can go onto the Land Registry website (you will need to register though first) and you can download the Lease Hold Title of any property you are interested (there is a free map search feature and you can put in the post code and find the LHT number and then go to ‘request official copies’ to instantly download) It costs £3.
The title will tell you how long the lease length is and also who the freeholder is (a big determining factor when buying a retirement flat as you don’t want any of the evil freeholders to be in charge.
It is free to then copy the name of the name of the freeholder company into https://www.duedil.com to see how big the company is. More telling is to check the directors out by clicking on the ‘People’ tab and seeing which other companies they own. If the are directors of many freehold and management companies you will know that they are professional freeholders and will really know what they are doing so proceed with caution.
I know it is a bit fiddly but I hope it helps you be able to carry out the same research a solicitor will do for you but for the cost of just £3
All the very best.
Louie, thanks for that advice, I am sure many readers will be unaware that this information is available for just £3.
I think I have solved my own problem, (at least I hope so), by purchasing a retirement apartment on a 999 year lease with a Management Company and Landlord who are non profit making. We shall see.
Very informative post- will study this in some detail,. Thank you.
As a general rule ANY dealings with our freeholder is an absolute minefield. Seemingly innocuous conversations or casual emails have legal comebacks, I learned that the hard way. The managing agent always preferred to phone and ‘chat”, so there was never anything in writing that we could get hold of.
I would welcome the comment of Louie concerning the under LKP report “How JBLeitch just cannot resist the F-word for forfeiture”.
In exchange for permission to sublet (and after ludicrously excessive costs) the demand is then made that the leaseholder agree to a 50% increase in the current Ground Rent!
It seems to me that attempts to manipulate current Ground Rents, either through informal lease extensions (and also formally through the 1st Tier Tribunal), or as above, has fast become another major racket in this unregulated field. .
Whilst we may wait for leasehold reform, is it too much to ask that existing laws which already exist are enforced and all those (including unprincipled legal advisers) who manipulate these laws are dealt with. appropriately.
There should be no hiding place for the manipulators of the F-word.
Can LKP/Campaign against retirement leasehold exploitation, .Sir Peter Bottomley, and Jim Fitzpatrick ask Brendan Lewis during the amendment stages to the Housing Bill for confirmation that the Government do intend to uphold the law as it already exists under the provisions of the LTA 1987 (as amended by the Housing Act 1996) as well as those provisions of the Commonhold & Leasehold Reform Act 2002 already effective and in force?
As matters stand, existing legislation is being trampled on and ignored with impunity by these unscrupulous “professional freeholders” and their unprincipled partizan advisers. ..
Hi Alec
I agree with every word you wrote. The ground rent element of being a freeholder is a huge attraction for them because it is 100% guaranteed future revenue. The government has not helped matters by giving ground rent investments a AAA rating for investments, the safest you can get!
Ground rents are the holy trinity for FHs as they make the actual money from the ground rent each year as a yield, they know the escalating ground rents mean they have lovely cash bonuses when the property owners need to extend their lease again and they can borrow money from the bank on their ground rent portfolio to buy even more ground rents! Peverel famously used the future ground rent income to help re-structure a rescue deal with the bank.
It is estimated that around 100 million of new freehold stock comes into the market each year which is being chased by 400-500 million of money desperate to invest in it as it is so lucrative and safe.
This means many of the new savvy freeholders are protecting their ground rent yield investments by granting the flats a 999 year lease thus removing (they hope) the motivation for the flat owners to group together and buy the freehold of the building from them. A freeholder of this type will ensure that the ground rent is onerous. 100 flats with a GR of £300 per year doubling every 20 years? Not bad! (obviously they also make money out of service charges, building insurances and licences too)
It is just one huge depressing scam that thrives and exists solely on the misery of leasehold property owners. Of course the government could stop it all in a second with common hold but there are an awful lot of very wealthy freeholders out there…….
So if you’re sitting with an unwanted, leased, retirement flat (Inherited or have moved out) however you are still liable to management fees and Ground rent. If lease/appt wont sell and lease life is below 80 years, would you may be better off just letting it go for a song (providing it is paid off)??
New lease holder would then pick it up dirt cheap and continue to pay the outstanding management & ground fees till they don’t need it, then go through process again.
Is this feasible??….the Timeshare market appears to be functioning like this in some cases
Hi Terry, yes, providing you own the lease, (it is paid off) you can sell it at your price.
However, remember some leases have a clause where you have to pat a percentage of the original purchase price, sometimes a percentage of the sale .price.
If it is the latter not sure what could happen if you “gave it away”.
Also you say the new purchaser would continue to pay “outstanding management and ground rent fees”?
You, as the seller, would be responsible for all fees up until the day the lease is sold to a new purchaser, following which he/she pays all the future fees
Terry, if you own the flat but don’t want to extend the lease before selling you can, just don’t expect full market value for it, If this was a standard property (i.e. not retirement) it would always be better to extend the lease (or begin the process & get a Deed of Assignment drafted up) due to any flats under 80yrs being difficult to obtain a mortgage – therefore reducing your pool to cash buyers only. On this instance though the requirement for a mortgage may not be required due to your certain clientele, Therefore it may be just as easy to sell as is – just depends if you want the best price achievable. Have you checked out ALEP? website only for leasehold practitioners – I strongly advise speaking to a valuer/solicitor on there who may be able to give you some impartial advice.
Yes, consider a lease extension if you live in a “standard” property but it is not easy to extend a lease in an over 55s retirement complex. The landlord and managing agents only want to know when it is the whole complex being done at the same time. This normally also saves residents loads in legal fees..
If you need, or want to leave, the least stress free way to leave over 55 retirement leasehold apartment is just to get out and cut your losses.
For example, if I remember correctly, I think one of the worse cases was sometime last year. An apartment lease that was approx. £150,000 when new was “given away” for £15,000 in Oxford.
No prizes for guessing who the managing agents were
My neighbour and I went to the solicitor to discuss our lease extension options armed with the offers from the managing agent. As I want to stay put I opted for the statutory 90 year extension, peppercorn rent offer, whereas my neighbour who wishes to sell and didn’t want to fork out thousands opted for the informal offer with a huge increase in ground rent. He did ask the solicitor if the ground rent would put people off, but was told that it would just be another bill to pay like gas or electric! It did occur to me that any future buyer would be at a disadvantage especially when the 80 year trap came around again in 20 years time. I am disgusted that solicitors who are there to advise don’t explain the implications of not going down the statutory route.
The reason most solicitors don’t explain many things about leasehold, especially retirement leasehold, is they don’t know themselves.
On a similar note, I have lost count the number of estate agents who have asked me what are the differences between leasehold and freehold blocks of apartments and what are the advantages of freehold if any!! And they are supposed to put the correct value on these places
Sadly there seems to be a real case of ‘dazzled in the headlights’ when it comes to the initial purchase of these designer leasehold retirement gaffs. Family and aged relative overly impressed by sales pitch, brochure, tour of facility etc and little understanding or interest in the terms of the lease. As I Liddle points out : the management fee, ground rent etc is almost dismissed as just another ‘bill to pay’ with no concern as to the implications further down the line, when the race is run, and the so called asset needs disposing of.
With an aging population needing and wanting to downsize, and relativley large profits to be made on the sale of family houses purchased some 30 plus years ago, one can see the initial light bulb moment materialise in the minds of aged purchaser and their immediate beneficiaries…’Oh lets cash in on this oversized dwell house and buy this lovely little retirement flat and we’ll all be quids in’
Was Caveat Emptor ever more appropriate.?? (Maybe the Romans had a similiar episode during their decline and as such the phrase was coined)
An excellent summary Terry, and so true..
Louie a great article on `Trojan Horse lease extensions. Interesting figures, too.
I’ve agreed a premium of £7,800 for extending my lease on a 1-bed in E14. Add to that all costs and the total comes to £17,724. I am interested to know how the ‘negotiations’ work in practice. I was given an upper limit for the premium of £32k by the surveyor supposedly working on my behalf . He charges a percentage for every £ he ‘saves’ on the cost of the premium. So what’s to stop the landlord and surveyor collaborating over a premium of, say, £5o or even £100k? Over coffee in some Dockside cafe or wine bar – with a crate of wine to follow at Christmas? In my case, a promised visit from the landlord’s surveyor never happened. They fixed the premium without even looking.
Seems like more articles are waiting to be written!
Wow! Sue that does not sound good at all!
Are your figures correct? It cost £7,800 for your lease extensions but you had to pay an additional £9,924 in legal and valuation fees? That is exceedingly excessive. We normally advise clients that the total they will have to pay on top of the cost of the lease extension is between £3,500 to £4,000 for all you legal and valuation fees, your freeholder’s legal and valuations fees, VAT, land reg fees etc. I hope your figures are a typo.
Yes, you hit on another scam done by the valuers you employ to supposedly ‘protect your interests’ It is called a success bonus (in true Orwellian ‘double speak’)
This is where unethical valuers know that most flat owners don’t understand the freeholder’s counter offers are just stuff and nonsense. So they say to flat owners ‘give us X amount for the valuation and we will also take 15% of whatever we ‘save’ you on the freeholder’s top price’
We hate this and for us it’s a kind of fraud. Valuers do not have to collude with freeholders to fix the counter offer, we can all pretty much guess what the CO will be, before it comes from the various freeholders. In our office we play ‘guess the ridiculous counter offer game’ as they come in.
We had a lady in tears on the phone recently who was very upset as we offered 21k for the lease extension and we told her the cost will be 28k ish, the freeholders counter offer was £135k! We settled at £27.4k.
Stuff and nonsense but good if you are getting a slice of this for nothing if you are a valuer. Instead of getting £1,500 for a valuation you get £21,750!
Last year I spent a disagreeable hour with a drunk valuer from a very large firm of chartered surveyors who was bragging that he had just ‘made £78,000 for putting three figures in a spread sheet’ as he had charged the flat owner a success bonus.
The worse thing is many flat owners think the valuer as done them a really good turn.
I think it is disgusting and I never have anything to do with valuers who employ these tactics and nor should anyone else.
Don’t think I got my sums wrong Louie – it frightens me now you mention it. The upper limit was in fact £35k. David whose Leasehold firm operates in the Capital (if I scan put it like that) took 10% on the ‘saving’, as he sets out below. Fraud is endemic in the leasehold sector but they don’t see it like that of course.
STAGE THREE – Negotiations
You do NOT need to instruct us with regard to the negotiations at this stage, however we will offer you the following two options in due course if we reach the negotiation stage:
The first option will be a performance related fee in the sum of only £ 750- plus vat minimum fee payable at the start of the negotiations, plus ten per cent of any saving achieved against the opening offer figure contained in the legal notice from the Freeholder (this fee will be payable when the price of your lease extension has been agreed and your solicitors have been instructed to reach legal completion).
The second option will be a proposal from you for a reasonable fee structure that is acceptable for the negotiation work (for example you may not want to pay a fee at the start of the negotiations as you wish to incentivise our firm with a higher performance related percentage fee).
We look forward to your instructions to proceed with the negotiations.
Many thanks.
David.
My goodness!
That is so so wrong. I have just shown this round the office and it is a shame that I can’t print the comments here.
I’m really not sure how it can be that this leasehold sector is allowed to act in this way with impunity. If this was a builder caught charging thousands of pounds to a customer for ‘special’ nails he would be prosecuted as soon as it became known, not in leasehold though. They get invited to speak at conferences to tell others how ‘they done it’.
I spoke at the LEASE conference last night to flat owners and the stories I heard just made me feel so sick to the stomach. It also made me even more resolved to make a difference.
I am so sorry you have suffered this experience.
Louie
Well we know who to avoid in future don’t we?
Leasehold firm operating in the Capital run by David.
They are so arrogant, these people. I knew he was a crook. he sat for an hour own my sofa regaling me with stories about other crooks the property sector. Included tales from Cannes where the property elite gather once a year to do the business. He said local authority managers were selling off UK land and blocks of flats to foreign buyers like there’s no tomorrow. UK buyers don’t get a look in – certainly not first-time buyers.
One to watch.
(: