Thousands of leaseholders who signed informal lease extensions – or bought flats with them – are going to see the value of their properties fall, and the nesteggs they put aside for their old age fall away. This is the greatest scandal in leasehold and it is only a matter of time before it unravels
By Louie Burns
It has been immensely gratifying over the last few months to see the focus firmly remain on the leasehold house scandal where many of the largest developers needlessly sold houses as leasehold.
To make matters worse they embedded excessively high ground rents with accelerating clauses which see them double every 10 years or are linked to RPI. They also inexplicably buried clauses in the leases that allowed the new freeholders to demand huge sums of money for licences and permissions to be paid to them by the unsuspecting leaseholders.
This has left tens of thousands of people in seriously financially disadvantaged positions which has caused them severe stress and upset all caused by major developers who they trusted, a real scandal.
Through the indefatigable efforts of The Leasehold Knowledge Partnership and the National Leasehold Campaign Facebook page, the continued focus on this needless scandal has started to bring real change.
There have already been statements from the Housing Minister, the Prime Minister and even in this years’ Queen’s speech all promising to end the leasehold abuses.
It has also seen Taylor Wimpey offer 130 million pounds to try to ‘rectify’ the doubling ground rent scandal. On top of that Nationwide Building Society have now altered their lending criteria on leasehold properties with many other lenders confirming that they are reviewing their current criteria too.
Arguably though, the biggest benefit achieved so far has been to raise the issues of ground rents in the consciousness of the nation.
There is however a bigger scandal on a much greater scale that involves doubling ground rents that is waiting to be uncovered. This scandal has already affected hundreds of thousands of people.
This scandal is receiving virtually no media nor political focus and many leaseholders are completely unaware of the trap they are blindly falling into.
I am referring to informal lease extensions undertaken for leasehold flats.
What are informal lease extensions and what are the real issues surrounding them?
If you need to extend your lease you have a legal right to extend your lease by an additional 90 years and importantly your ground rent is reduced to zero.
Once completed this strips out any future income from ground rents and lease extensions for the freeholder and they really don’t want this to happen.
Avaricious freeholders and their oily legal advisors put in a huge amount of effort to prevent leaseholders using their legal rights to extend by constructing ‘Machiavellian’ informal offers which are quick, easy and seem to save you money but the very opposite is true.
How do freeholders push their informal lease extensions onto you?
If leaseholders decide that they need a lease extension they will generally contact a solicitor or valuer to ask their advice. The majority of these professionals will recommend contacting the freeholder directly in the first instance to ask them how much they want for the extension. They will claim to be ‘experts’ in negotiating directly with freeholders and point out it could save you time and money.
Even if you don’t contact your freeholder directly, you will often find you receive an informal deal from your freeholder once you have Served the legal Notice to extend.
Here’s someone who knows how to play the lease extension game:
Martin Paine ‘is a crook who is turning sleaze in leases into an art form’, MPs told
Many freeholders have a process of refusing to negotiate on a legal lease extension and promise to be difficult throughout whilst presenting their informal offer which they will complete on cheaply and easily.
Once the ‘deal’ arrives from the freeholder these professionals acting for you will often intimate, with heavy caveats of course, that it is a good deal for you. If it’s a bad deal but you’re extending because you wish to sell the flat, they will often advise you to let the person who buys from you ‘deal with the consequences, why should you worry?’
These deals will usually offer to extend your lease back up to only 99 or 125 years.
For example if the lease on your flat had fallen to 80 years it would only be topped up by 19 years to 99 years as opposed to having a lease length of 170 years through the statutory route)
Instead of reducing your ground rent to zero they will include new onerous ground rents that can be between £250 – £500 per year. Their coup de grâce will be to link this onerous ground rent to an aggressive accelerator, like ground rent doubling every 5 or 10 years.
This is evil genius by freeholders because not only will they make a fortune from the actual ground rent they will now collect, they know that in another 15 years or so someone will have to extend the lease again and with ground rent that high they will have to pay many tens of thousands of pounds for the extension.
They have turned a one-off lease extension that may have earned them a few thousand pounds into a valuable asset that could easily earn them at least £60,000 to £70,000 over 15 years.
If you would like a full explanation of why informal lease extensions are so damaging, please click here.
What does this mean for the flat owner?
Leaseholders who tried to rectify their lease length and accepted one of these informal lease extensions have sold themselves into huge debt to save just a few hundred pounds on the cost of a statutory lease extension.
At best, it will strip any equity that they may have built up over the years in their flat and at worse it will leave them with an unsellable flat.
If you have accepted a ‘quick and cheap’ informal deal to enable you to sell your flat, you may now find a much more cogent buyer refuses to buy your flat, or he may offer a much lower price for it to take into account the dreadful deal you have signed.
Potentially, buyers will now also find it much more difficult to secure a mortgage on a flat with onerous ground rent terms as lenders tighten up their lending criteria. This could leave you with a flat that is unsellable.
There is no doubt that due to this increased focus on ground rents from buyers and lenders real care should be taken before you decide to agree to accept an informal offer.
How can informal lease extensions still be legal?
What is so astounding is the fact that these informal lease extensions are allowed to happen in their thousands every year to unsuspecting flat owners.
In a world that offers so much consumer protection, how can greedy freeholders be allowed to trick people with complex compounding financial deals that ruin lives?
How can it be illegal to sign someone up to a £10 a month mobile phone contact without spelling out every single aspect of the deal first but it is legal to trick someone into a complex deal which could cost them £50,000 with no legal recourse?
How can informal lease extensions be unregulated still?
What is the best way to keep free from the effects of these informal deals?
Don’t ever consider accepting an informal lease extension offer.
Insist that the ground rent is reduced to zero (thus stripping out any future value)
If you are buying a flat, ask if the lease has ever been extended.
If the lease has not had 90 years added or if there is still ground rent, it’s had an informal lease extension.
If so, has demand to see the ground rent and when it increases as a matter of urgency.
Consider carefully the real implications of the deal before buying.
This can only be answered by Government, the DCLG and LEASE who are all totally silent on this scandal.
Property tribunal upholds lease extension ‘scandal’ that pays millions to freeholders
There is no doubt that this informal lease extension scandal will soon be uncovered and written about and the scale of this scandal will be staggering.
I estimate that between 40-50% of all lease extensions carried out each year are informal and this has been going on for 25 years!
When flat owners come together and realise what they have been tricked into signing by amoral freeholders and their solicitors, a scandal of breathtaking proportions will be revealed and it will dwarf the current leasehold houses scandal.
There will be tens of thousands of flats that will be unsellable and thousands of normal hard working people will see that they have been tricked into giving away the financial provisions that they have made for their future over to greedy millionaire freeholders.
It is time for the government, trade bodies and the media to step in and rescue the forgotten casualties of the doubling ground rent scandal.
Related posts:
Taylor Wimpey’s snake oil ground rent review scheme makes toxic leases even worse: in my case, £25m worse!
Help offered to leasehold house owners facing onerous ground rents
Countryside Properties plc cracks over ground rents scandal …
Gavin Barwell: ‘No excuse for leasehold houses or punitive ground rents and we will stamp them out’
Retirement sector thought it would prompt leasehold reform, but leasehold houses and double ground rents were even worse …
The sector fights back … er, deploying LEASE chair Roger Southam
I think there will be a third major Leasehold problem looming in the future, in that many Retirement Flats are well down on their lease period.
Thousands of M&S apartments (and others) were built from 1980 onwards with 99 year leases, many are now down to around 70 years remaining. Which will make lease extensions very expensive and the properties devalued and difficult to sell when that time comes.
Over the past few years I have viewed many of these properties as a potential buyer, and I always made a point of asking what was the remaining lease period and has an extension been applied for.
The answers I generally got from Estate Agents and The Complex managers was that they had no idea.
All the residents I asked gave the same answers. That was at their age 70 years was long enough. Many had no idea what leasehold was.
The likes of M&S and Peverel/First Port never appear to advise them on this. Maybe it is not in their interest to do so.
I have even seen very expensive Retirement Villages properties being sold on short leases.
I can see a major problem looming, probably for the current retirees descendants.
Very good point, Michael. And ground rents are up for 25 year reviews.
£600 a year is not unusual. The property sector knew what it was doing with this asset management.
Michael Hollands,
On the presumption that many elderly leaseholders in retirement developments would not wish to extend their leases (on the basis of “If we are in our eighties 70 years on the lease will see us out easily!” what then if they pass their flat on to their children?
Whilst of course a mortgage would not be a problem as most people moving into a retirement development are trading down, a short lease would have a profoundly negative effect on the value of the flat, and making it very difficult to sell. And of course, the children will have to pay all the service charges until they can sell. Indeed in some cases any failure to achieve a sale may even affect the granting of probate? All this would potentially leave those children a easy prey to any firm that could thrive on purchasing retirement properties at distressed values and using them to rent them out?
Correct and we know of one company who does exactly that.
My blood boileth over about ground rents and the fake news that RPI indexing is better than doubling. I don’t have the net skills to link to a xls file, so here’s my next best effort…
In my humble opinion the only safe way to check if one method of GR is ‘less onerous’ than another is to calculate each capitalisation (present value or PV for short). The actual cash paid will track the PV pretty closely and PV is what the GR is worth when you come to extend or enfranchise.
The magic formula is:
=PV(Yield%,Numperiods,Payment)/(1+yield%)^Deferment period*-1
Yield is around 6 to 8% (lower % = higher PV. I know go figure)
Numperiods is the interval (or increment) between reviews: 10 yrs , 15 yrs etc.
Payment is the GR for that interval.
Deferment period is the cumulative years up to each payment kicking in.
For fun let’s start with a 79 year lease (ripe as an opportunity) and the now familiar doubling every 10 years with a ‘modern’ starting rate at 99 years of £250:-
Take GR yield at 6%
1st GR payable for 10 years @ 250
2st GR payable for 10 years @ 500
3rd GR payable for 10 years @ 1000
4th GR payable for 10 years @ 2000
5th GR payable for 10 years @ 4000
6th GR payable for 10 years @ 8000
7th GR payable for 10 years @ 16000
8th GR payable for 10 years @ 32000
9th GR payable for 10 years @ 64000
10th GR payable for 10 years @ 128000
PV (1st GR) = PV(0.06,10,250)*-1 = 0 (because we’ve passed that increment, innit
PV (2nd GR) = PV(0.06,10,500)1+0.06)^10*-1 = 0 ( that one’s gone too)
PV (3rd GR) = PV(0.06,10,1000)1+0.06)^0*-1 = 7360 (no deferment because we’ve just started this increment at 79 years.
PV (4th GR) = PV(0.06,10,2000)1+0.06)^10*-1 = 8220 (deferred 10 years)
PV (5th GR) = PV(0.06,10,4000)1+0.06)^20*-1 = 9180 (deferred 20 years)
PV (6th GR) = PV(0.06,10,8000)1+0.06)^30*-1 = 10252 (deferred 30 years)
PV (7th GR) = PV(0.06,10,16000)1+0.06)^40*-1 = 11449 (defrred 40 years)
PV (8th GR) = PV(0.06,10,32000)1+0.06)^50*-1 = 12786 (deferred 50 years)
PV (9th GR) = PV(0.06,10,64000)1+0.06)^60*-1 = 14279 (deferred 60 years)
PV (10th GR) = PV(0.06,9,128000000)1+0.06)^70*-1 = 14737 (deferred 70 years)
Total PV = £88263.
Nice little earner.
By contrast, a start rate of £100 with all the same ingredients would bake to a PV of £35305.
By even lighter contrast, a start rate of £250 doubling on a 33 year interval would bake to a PV of £6524.
Without all the maths malarky,
Testing increment rates of 10,15,20,25,33 years (99 year lease now 79 yrs)
Doubling versus RPI(between 2.5% and 4.5% – no reason but whatever)
Initial rates: £100, £150, £200, £250, £300
I can offer:
Absolute best lease extension deal I could do for you at 79 years, sir, without having to sell one of the children, would be:
£100 doubling every 33 years (PV £2610)
But I do have a special I kind of like :
£300 doubling every ten years (PV £2,906,400)
I say, steady old cove.
RPI indexing you ask?
Best deal I can do there is:
£100 @ 2.5% incrementing every 33 years (PV £2890)
Yes it is variable, sir, and yes it might go up a tad, shall we test at 4.5%?:
£100 @ 4.5% incrementing every 33 years (PV £5518).
But I’d hope we could agree a nice modern deal, fresh in today? No, not one of those naughty doubling rates.
Everybody likes RPI these days. Suit you sir?
I can do a few rather tasty RPI extensions:
£300 @ 4.5% incrementing every 10 years (PV £413793)
But we don’t think RPI will ever be that unreasonable, do we?
£300 @ 3.5% every 15 years (PV £19363)
Sir? Where are you going?
Formal route? You absolute cad!
£220,000 over the term of my 125 year lease that doubles every 25 years. That’s without the added cost of statuary lease extension of 90 years. Eye watering.
Oh dear, the £300 doubling every ten years was the total you would pay in 79 years. I did not want you to see that figure!.
The PV would be £105,916
Rats, more mixing total paid with PV:
Here are the correct PV figures all together:
At 79 years:
£100 doubling every 33 years (PV £2610)
£300 doubling every ten years (PV £105916 )
£100 @ 2.5% every 33 years (PV £2890)
£100 @ 4.5% every 33 years (PV £5518).
£300 @ 3.5% every 15 years (PV £16014)
£300 @ 4.5% every 10 years (PV £27121)
Must find out how to link to screen captures if only. I know the spreadsheet is right!
Failed to open the LEASE article referenced by LKP in the under Roger Southam posting. It repeatedly came up as “error”.
And a quick scan of LEASE home page Q,s and A.s seemingly shows a very clear bias in favour of informal lease extensions. The statutory entitlement to a 90 yr extension reducing to zero is played up as being arduous whereas a simple letter/phone call to the freeholder is portrayed as offering an easy solution, albeit with the freeholder, seemingly and understandably, looking for a new “modern” ground rent clause!
I suggest a more detailed study of this Q’s and A’s section of the LEASE site requires closer scrutiny as frankly it STINKS.
The developments around here were build 1983. Now there are lots of properties for sale.
Adverts information: 125 years lease, ground rent to be advised!
In 1983 the leases were 125 years, The Lease started 1982, which many didn’t understand why
since the completion was 1983.
Many mainly young people purchasing these properties probably don’t know what they are purchasing.
Some probably never heard of the rip off antiquated Leasehold. The leases are now for extension.
I thought amongst many others that under the normal circumstance 125 year is fine nobody lives that long. However under the antiquated Leasehold system nothing is normal. Corrupt dishonest system nowhere else in the world!
I sincerely hope these new purchasers don’t be mislead and trapped without realising the consequence.
If you work in a company there has to be a “business case” for everything, even for providing stationery. How does it benefit the business?
So what is the business case for ground rent? What benefit does it offer? What services does the landowner offer? Does he do anything at all?
No, all he does is collect money for nothing and there is no business case at all for us having to pay any ground rent not even a peppercorn ground rent.What for? What is it for? It is money for nothing! The landowner makes us pay ground rent because he can, not because he offers anything. Like foxes running a chicken farm.
The solution is to abolish leasehold for all houses now and retrospectively. The freeholder deserves no compensation.
In the main I agree with Keith. The ground rent investor market is only designed to make a profit for its investors, at the cost of leaseholders. However, I can say that any ground rent collected from leaseholders on my block is held in reserve to plough back into the building. The same thing applies to lease extension premiums. The RMC freehold directors receive no financial benefit themselves. I appreciate this not indicative of the big players, who due to their greed have made leasehold a very difficult tenure to manage. Indeed legislation has been continually changed in order to make lease more equal to leasehold which is impossible because leasehold is an ‘interest’ cut from the dominant estate of freehold. To effect the change that this site wants is surely impossible?
Sorry that should have read ‘make leasehold more equal to freehold’
Informal lease extensions could be a real pain. The extension period is most probably going to be 99 years or more. Furthermore, there is less certainty, as the property owner can alter the term of the agreement, There might be chances that he could put out of the agreement altogether at any time. No doubt, the landlord has the flexibility to propose less beneficial terms in the new lease.