Charities and housing associations are ‘ripped off’ as bogus sales prices are recorded on Land Registry, it is claimed
Many leasehold house buyers are in negative equity owing to over-valuations
Developers’ ‘morally debatable’ conduct over leasehold house sales, with ‘huge benefits’ to use recommended solicitors
If developer recommended solicitors complete within 28 days, there is a £5,000 ‘discount’
Developer recommended solicitors seek to limit liability and buried warnings of conflicts of interest
Appeal to cap the ground rent on existing leases to save existing leasehold owners with onerous terms.
The All Party Parliamentary Group on leasehold reform was told that leasehold houses and the sales process involved in offloading them onto buyers were “absolutely disgusting”.
Homebuyers are “pressured” into accepting discounts to use recommended professionals – solicitors, mortgage advisors – to complete the deals.
Inflated prices are recorded on the Land Registry that ignore discounts – called “allowances” or “incentives” by developers – which can amount to £80,000 off the price.
Housing charities and housing associations then buy up the unsold properties unaware of the substantial discounts already obtained, homebuyers claim.
LKP questions whether developers’ bankers are aware that prices on the Land Registry may often be bogus.
Ordinary home buyers have also bought over-valued properties, and many are very likely to be in negative equity.
This disturbing picture of the leasehold housing market was outlined to MPs by Mari Knowles, a former conveyancing solicitor, who now runs Leasehold Law.
She has spent four months analysing more than 100 conveyancing files of leasehold house owners.
“With leases, you usually see a natural burden and benefit on the part of both sides: the freeholder and the leaseholders.
“The leases here are very onerous and very one-sided, and are nothing more than a money-making mechanism.
“One thing that has not been addressed at all is that of the valuation of these leasehold houses.
“It is a recurring theme in all these conveyancing files that just before leaseholders are about to purchase, the mortgage valuations come in and quickly identify that these leasehold houses have actually been overvalued.
“Some of these leasehold houses have been overvalued by as much as £80,000.
“Normally, when you have got a over-valuation the property price is just reduced, and you buy it for the reduced price.
“But the way the developers have dealt with this was by way of an ‘allowance’, rather than a price reduction.
“My clients have asked the developers to explain why. They have been told that it is because quite a lot of the housing stock is being sold to housing associations and housing charities. Developers need to keep the recorded purchase price on the high side in order to validate those prices for sale to the housing associations.”
“So, they are ripping off charities?” asked Sir Peter Bottomley.
“Yes. That is why I am here today to unearth these findings.
“It is absolutely disgusting.
“I have taken witness statements. It goes further than that.
“It is not just about covering up the real value of these properties.
“When you read the conveyancing files – and I must stress that I’m not convinced that I am being given all the conveyancing files and I do think that there is paperwork missing – what is not evident is that these miscalculations in purchase price are always being reported back to whoever is handling the day-to-day mortgage.
“I’m very worried that a lot of leaseholders are taking out mortgages for more than what the property is actually worth.
“This means that they are currently in negative equity.
“When you are looking at over-valuations of £80,000, and that is not for just one property, then this is a huge issue and one that I would please ask should be further investigated.
“What the developers have done is clearly morally debatable. Whether or not there is any action in law, or whether anything they have done is actually unlawful, are completely different.”
Mari Knowles then moved on to consider the role of solicitors in the leasehold houses scandal.
“It is very clear that the same small group of solicitors come up time and time again.
“Solicitors are heavily regulated by the Solicitors Regulation Authority, but there are an awful lot of grey areas.
“I have encountered sharp practices, but I do not think at this stage that the data amounts to a professional negligence claim.
“I have seen heavily reduced legal fees, or subsidised legal fees. I have seen guarantees that solicitors can get the conveyancing through in 28 days, attracting the £5,000 reduction in the purchase price offered by the developers.
“I have seen a limitation of liability in a conveyancing solicitors’ terms of business.
“Usually, solicitors can be sued for up to six years. One firm of solicitors has reduced this in the small print of its terms of business limitation of liability to only three years.
“This has only come to light in the three to six-year period after the purchase. So, we could now face a legal argument whether or not exclusion of liability in solicitors’ terms of business is legally binding or not.
“I have also seen the production of reports on title to clients mere days before the 28-day deadline where developers offer a £5,000 discount on the purchase price.
“My concern with that is that £5,000 is an awful lot of money.
“It is a difficult decision for the purchasers. If they have read the report they may have questions. But the solicitor, on the other hand, is saying if you don’t complete within the next two days or so you will lose the £5,000.
“Even if the leaseholders were given the correct information, they were not given adequate time and access to the solicitors to ask questions about the meaning of what was in report.
“Lastly, on the conflict of interest point regarding solicitors, I have seen some solicitors saying in their covering letters that Rule Three of the Solicitors’ Code of Conduct 2007 applies. There is no explanation of what Rule Three is.
“There is no further advice, and there is no offer of assistance if the leaseholders wish to discuss this.
“Rule Three of the Solicitors Code of Conduct 2007 is the rule that states that there is a conflict of interest. The Solicitors Regulation Authority requires all solicitors to declare if there is a conflict of interest.
“So, in some of these cases there are conveyancing solicitors who are clearly in a position of conflict. They are doing the absolute bare minimum to advise that clients there was a conflict.
“When I asked clients whether they knew what this meant the obvious answer was no. They did not have a clue. Solicitors produce an awful lot of legal paperwork and leaseholders cannot be expected to know the minutiae of the 2007 regulations.”
Mari Knowles has also examined the role of mortgage companies and surveyors.
“It is clear that valuers acting for mortgage companies did know about the ground rents. But when you look at the mortgage valuation report in the conveyancing paperwork, every single case only refers to the initial ground rent. Not to the doubling ground rent.
“I am still waiting for answers from mortgage companies to ascertain whether or not they knew that the ground rent doubled, or if they were told on day one it was just a fixed ground rent.
“Of course, all leaseholders’ communications with the mortgage company and the mortgage valuers were dealt with by their financial advisors, who were in turn recommended by the developer.
“I would urge that we not only look at prohibiting leasehold houses, but we also do something to assist those leaseholders who already have these leases.
“In my opinion, the quickest way of doing this would be to cap the ground rent on existing leases.
“I appreciate that is going to have huge financial implications and that it is going to be controversial. But by capping the ground rent that will minimise the amount that leaseholders will have to pay when they enfranchise.
“It will also stop the position where someone has to pay £158,000 a year in ground rent when they retire.”
Miss Knowles’ speech was heard with close attention and was strongly applauded at its end.