And Homeground is ‘racketeering’ over freehold consent fees, as well
‘Cynical business decision’ by developers
‘Individual solicitors have to answer for what they have done’
My constituents ‘believe that they have been comprehensively stitched up and that is where this place needs to take action’
One of the most powerful interventions in the debate came from Justin Madders, a solicitor and Labour MP for Ellesmere Port and Neston.
He described the ground rent and leasehold houses controversy as “nothing short of a national scandal”.
He accused household name developers such as Taylor Wimpey and Bellway running a racket even though they receive “millions of pounds from taxpayers to provide affordable homes and have also been the recipients of generous subsidies as a result of policies such as the Help to Buy scheme.”
He accused Homeground – the management company of Long Harbour, the ground rent investment fund set up by Will Astor, Viscount Astor’s heir and Samantha Cameron’s step-brother – of racketeering over freehold consent fees.
He also said “individual solicitors have to answer for what they have done”.
He added: “I do not think that the legal profession comes out of this with any great plaudits, but clearly the fault for having the clauses in the first place lies with the developers, and I have yet to hear any reasonable explanation for why they are there in the first place.”
“What we are discussing today is nothing short of a national scandal. It is the PPI of the house building industry. Every now and again a sharp practice comes to light which is totally unconscionable and of which every reasonable person would say, “We cannot allow this to continue. Parliament must act.” This is one such occasion.
“… As we have heard, there is a huge range of issues underneath the misleadingly simple title “leasehold”, and I hope that today’s debate will bring about progress in resolving some of the huge injustices that I, too, propose to speak about.
“I echo the tribute paid to the Leasehold Knowledge Partnership for the excellent professional assistance that it has provided to us and to the many homeowners affected by the issues discussed today.
“Thousands of people around the country who bought new homes in good faith are the victims of what can only be described as a racket by some of the country’s best-known developers, who between them have received millions of pounds from taxpayers to provide affordable homes and have also been the recipients of generous subsidies as a result of policies such as the Help to Buy scheme.
“As we know, the practice that has developed is to sell new homes on a long-term lease, with a misleadingly low ground rent and buy-out price.
“This practice has become common in my constituency over the past few years and, contrary to what is asserted by some developers, it is not a tradition in my constituency. It now seems to be part of the business model of a great many developers. It is a clever way of selling more units, by dropping the asking price a little to reflect the fact the property is leasehold, but failing to make it clear that in the long run the homeowner will pay far, far more than they would have done if the property had been freehold.”
Chris Green (Conservative, Bolton West):
“Does the hon. Gentleman agree that when ground rent or other charges double, it would be usual to expect double the service? As this is not the case, it goes against natural justice.”
“I thank the hon. Gentleman for his intervention. I know that his constituency is affected by the issue. I have yet to see any evidence that higher ground rents result in any kind of service, particularly for the properties that I am talking about.
“Obviously, leasehold flats are a slightly different matter. I remember when it was common, if there was a leasehold, for the rent to be described as a peppercorn rent. The implication was that that was nothing other than a symbolic exchange.”
Sir Peter Bottomley:
“A service charge or maintenance charge is one thing; the ground produces nothing. I meant to pay tribute to Bob Bessell, of Retirement Security who, when asked at the all-party meeting what the ground rent was for, said that it does not produce anything of value so he goes for only a peppercorn. It seems to me that if he can say that openly, others should as well.
“I thank the hon. Gentleman for his intervention. He is spot-on. The notional figures that we are used to seeing as ground or peppercorn rents ought to come back. We have seen a drip-feed of figures coming in, relatively modest to start with—more than a peppercorn, but still modest—and the ratcheting up of those figures in some leases is my main concern today.
“When people buy their home, they like to know who they are buying it from, but leaseholds are often sold on to third parties who can then vary the agreed terms of the leasehold, at which point—this is a scandal—developers claim that it is no longer anything to do with them.
“This is an issue affecting my constituency. I have been contacted by a number of constituents affected by it.
“One, Beverley O’Malley, bought a Taylor Wimpey property.
“That company provided her with a letter at the point of sale stating that she would have first refusal to buy the leasehold at 15 times the ground rent, plus £199 for legal costs. That lease has been sold on without any option to purchase at this time, and she has now been informed that the letter provided by Taylor Wimpey is not worth the paper it is written on.
My calculation is that if a £250,000 house has a £250 ground rent that doubles every 10 years, over 60 years the successive leaseholders will have paid £157,500. For that still to be 1% of the value, the house will have to be worth £80 million; that is in the first 60 years of a lease.
“Another constituent of mine bought her property from Bellway in 2010 with a lease of 150 years and a ground rent of £125 per annum. In July 2015 a quote of £3,750 to purchase the freehold was provided, which equated to 30 times the ground rent.
“However, in March 2016, when attempting to purchase the freehold, my constituent was informed that the lease [freehold] had been sold to a company called Adriatic, with Homeground acting as the management company, although quite what it is managing remains to be seen. Following this transfer, my constituent received a new quote to purchase the freehold at £12,750.
“That is more than 100 times the ground rent.”
“No explanation was provided as to why the price had gone up so much, but counter-offers for purchasing the freehold were made by my constituent’s solicitors, which resulted in a revised quote of £6,750.
“The quadrupling of the buy-out price for the ground rent, then the halving of it after negotiations started, as well as information given to me that the prices quoted can vary significantly for almost identical properties, suggests that the buy-out costs are calculated on nothing more than what the investors think they can get away with.
“The same constituent recently obtained planning permission to extend her home, but was told that she needed to obtain consent from Homeground in order to proceed, for which she was charged a fee of £333. However, following payment of that amount, an additional £2,440 was requested for the same purpose. This amounts to nothing less than racketeering and it should be stamped out.
“Possibly the most alarming case that I have heard is that of my constituent Lindsay Lloyd, who bought a Taylor Wimpey property in 2009 on a long-term lease. She was reassured that such leases were common practice and that she would be able to purchase the freehold in future for £2,600. She received that advice from solicitors who were recommended to her by Taylor Wimpey, and she felt under some pressure to appoint them. She was advised that the lease did not impose an unduly onerous or prejudicial burden.
“I wonder whether whoever was advising Ms Lloyd had even read the lease. I have, and it states that the ground rent will double every 10 years, so next year, for example, it will rise from £175 to £350 a year, which is a big increase.
“I can accept that £350 a year for ground rent does not sound too bad, but in 50 years’ time it will be over £11,000, in 100 years’ time it will be over £350,000, and in 200 years’ time—I hope the houses last that long—it will be a staggering £367 million a year.
“Nobody expects to be around in 200 years’ time, but anyone who wants to buy the house will think twice once they realise that they would be agreeing to a contract that commits them to an annual payment of millions of pounds. What that means in practice, of course, is that nobody would purchase the property, so where does that leave existing owners? I really want to hear about that from the Minister today.”
Sir Peter Bottomley:
“The solicitor’s advice is a critical part of this. If the solicitor does not tell the first purchaser that this is a penal clause, what advice would they give to a prospective buyer six years later, who would be facing a doubling of the ground rent in four years’ time? It seems to me that the advice ought to be the same, but I bet it would not be.
“As a former practising solicitor—not in this area, I hasten to add—I think it is fair to say that some solicitors are now probably more alive to the traps that can be found in leases. I have looked at my constituent’s lease, and to say that it is not set out very clearly would be an understatement, but it still should have been picked up on.”
Bob Stewart (Conservative, Beckenham):
“Following what my hon. Friend the Member for Worthing West (Sir Peter Bottomley) has just said, surely it is the responsibility of a solicitor helping someone to buy a house to point these things out, because they are professionally qualified and they should know very well what is happening? I cannot understand why that does not happen.”
“I think that individual solicitors have to answer for what they have done. From my knowledge of the profession, I think that over the years we have seen a much more streamlined process for advising people on their purchases and sales and lots of standard documentation, which I think is why some of these things have been allowed to happen.
“I suppose the real question is this: why would a developer want to put such an onerous clause in a sales document, knowing that if word of it got out people would think very carefully about whether they wanted to buy the property?
“As we know, they are selling these leases on to third parties, so actually there is no benefit to them. That is the heart of it. I do not think that the legal profession comes out of this with any great plaudits, but clearly the fault for having the clauses in the first place lies with the developers, and I have yet to hear any reasonable explanation for why they are there in the first place.
“My constituents feel that they have been duped by Taylor Wimpey. The reservation form that they signed stated that the ground rent was £175 a year, and there was no mention of it doubling every 10 years. I understand that Taylor Wimpey has now decided not to sell any new properties on a leasehold basis, which is good news—
Sir Peter Bottomley
“Any new houses.”
“Yes, any new houses. But that does not help my constituents, who believe that they have been comprehensively stitched up. That is why this place has to take action.
“At the moment there is no way out of this for my constituent. She recently enquired about purchasing the lease and discovered that it has been sold to a company called E&J Estates, which is now quoting her a price of £32,000 to purchase it.
“No wonder it quoted a price over 10 times what she had originally been offered, given what it could rake in over the years. However, having already made significant commitments to purchase the property in the first place, my constituent was simply unable to stump up such a significant amount.
“As disappointing as the response from E&J Estates was, it was a struggle even to get a response from it at all. It initially refused to speak to my constituent about her circumstances, stating that it had a “long-term interest in the property.” Well, so does she: it is her home. And it is a home that has been saddled with an obligation so onerous, so outrageous, that nobody with an ounce of decency in their body would not say that this place had better do something about it.
“It is not enough to say that leasehold valuation tribunals are there to resolve these issues, because these companies are going out of their way to obstruct and delay the process. I do not know whether anybody here has taken the time to read one of the tribunals’ decisions, but I suspect that very few people would feel comfortable going into one of them without a lawyer, and probably also a surveyor. Certainly the freeholders seem to do that, and from what I have seen they also put the cost of their representation back on to the homeowners as well, rubbing salt into an already very expensive wound.
“Although I have named Bellway and Taylor Wimpey, the practice of selling new builds on a leasehold basis appears to be commonplace across the majority of new build estates in my constituency. I should make it clear that the examples I have given of how my constituents are adversely affected do not apply to every developer selling leasehold properties, although every developer I have contacted has indicated that they intend to sell on their interest in the leasehold at some point. That really is where things go wrong, because once they sell them on, the new owners have no interest in anything other than extracting the maximum amount of profit from their asset.
“Of course I accept that some properties by their nature lend themselves to being leasehold, but that does not apply to the vast majority of the properties being built in my constituency, which are detached or semi-detached family homes. There really is no reason for those properties to be sold as leasehold. It is a cynical business decision, which will in the long run damage the reputation of those involved.
“It is also disappointing that the newest development in my constituency, currently being constructed by Redrow Homes, is also being sold on a leasehold basis. Redrow tells me that this fact is made known to purchasers before they reserve their property, although I note that on its website the promotion of that particular development makes no mention of that. What is particularly disappointing is that Redrow, despite my asking twice why it feels the need to sell large detached family homes on a leasehold basis, offers no justification whatsoever.
“It is quite clear that this situation needs to be addressed. I have several questions for the Minister. My first is very simple: are the Government happy with this state of affairs? If not, will he set out today, or in the very near future, exactly what he will do to stop these scandalous practices? Does he agree that developers should be prohibited from recommending a particular solicitor to purchasers because of the clear potential for a conflict of interest and the clear failure, as we have seen here, to provide the best advice?
“Will the Government consider legislating to prevent ground rents being doubled every 10 years? Will they intervene to give some hope to those now saddled with the eye-watering commitments that nobody—not the developers, not the lawyers and not the Government—warned them about? Will the Minister consider withdrawing and recouping taxpayer subsidies to any development found to be ripping off householders in this way? Will the Government ensure that there is greater transparency at every stage of the process, with purchasers receiving clear information about the arrangements they are entering into?
“Finally, I would like to pass on the following message to anyone listening today. If you are looking to buy a new home built by Taylor Wimpey, Bellway or any other developer, look very carefully at the terms that are offered and ensure that you receive independent legal advice. My message to the developers themselves is to act transparently and offer leasehold only where it is strictly necessary.”
The debate can be seen here: http://www.parliamentlive.tv/Event/Index/fc53bd87-8abf-4986-b7ce-6a7a488b8cfc