The Leasehold and Freehold Bill is the most significant reform of the leasehold system for a generation, and many – including me – hope that this assault on all its outrageous income streams are its death knell.
Other jurisdictions have versions of commonhold, and so should England and Wales. This won’t be popular with freehold investors, or the terracotta army of lawyers, valuers, chartered surveyors, managing agents and insurance brokers whose income comes from our purposely complex and inefficient leasehold system.
But, as the great US journalist Upton Sinclair said in the 1920s: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
1/ Why is the government launching this assault on the leasehold, and why now?
Government – both the deep state and the Conservative administration – has become increasingly disenamoured of the residential property sector, in spite of its generous party donations.
Spreading leasehold houses around the country and squirrelling in aggressive 10-year doubling ground rents and other income earners in the leases was a disillusioning surprise. Not least because the plc housebuilders responsible were so generously subsidised by Help To Buy and grants from Homes England. So as well as quite knowingly dumping their customers into a mire of ordure, they were ripping off the rest of us as well.
In fact, the leasehold houses scam self-corrected quite quickly in 2017, as the media reported the issue that LKP had brought to light and consumers simply refused to buy these products. In addition, dozy mortgage lenders who had originally signed off on them, realised resales with such aggressive ground rent terms were impossible, and so switched off financing on ground rents above 0.1% of sales price.
Even worse was the fallout after the Grenfell tragedy. LKP was warning in the autumn of 2017 that it did not believe leasehold would survive the kind of scrutiny that would result.
As well as building with rip-off legal tenure, our cartel of major housebuilders built spectacularly badly. The sectors’ suppliers were then show to have cheated the existing safety regime, as the Grenfell inquiry discovered. Its report is awaited, with an an open question whether corporate manslaughter charges will result.
The upshot has been a multi-billion bill for taxpayers to put right the nation’s highrise blocks, and a levy on the housebuilders to cough up to put right their routinely shoddy workmanship.
Of course, government came to this conclusion only after rejecting developers and freeholders attempts to dump the entire cladding remediation costs onto the hapless leaseholder consumers with numerous court actions. Their only error was to trust household name home builders and purchase their products.
So government lost patience with our awful residential property sector, and in Michael Gove housebuilders – and freeholders – have a formidable enemy.
(A minor embarrassment of the new Bill is the absence of the much trumpeted ban on leasehold houses. This is easy to amend, however. )
2/ Who will gain financially from the direction of travel of the new legislation?
Leaseholders. The Bill is an assault on all the income streams in the leasehold sector, whether legitimate, such as ground rents, or dodgy, such as insurance commissions, legal costs, padding the service charges and the fag packet mathematical modelling to make enfranchisement as expensive as possible.
3/ What happens with ground rents then?
The government is pushing for all existing ground rents to be a peppercorn, which will directly impact billions of pounds paid by leaseholders to private equity investors who have hoovered up these assets over the past two decades. (Pension fund exposure here is minimal).
Several options are proposed by government in a consultation to be completed by December 21. But even the most modest will see a significant loss of ground rent income.
But won’t there be a legal challenge: a judicial review, or a freeholder bankrolled to take a case to the Supreme Court? That was a widespread assumption, but direct statute is difficult to challenge, and these proposals would have had Treasury and Number 10 scrutiny.
Ending ground rents would be great. It will cause tears, but not those of homeowners.
4/ What about service charges and insurance commissions?
They are to be addressed in a formalised schedule, that has to be comprehensible and on time – late accounts are absolutely routine in this sector.
The detail on this, and insurance commissions is to follow.
5/ Legal costs?
Bad news for the sector here, as well. Most leaseholder rebellions (say, over service charges) are utterly crushed by the imbalanced cost regime of leasehold litigation. The landlord gets his legal costs under the lease; the leaseholder never does. This is to be reformed and made equitable, producing equity of arms in these disputes. It should ensure fewer of them, as the highhanded management of freeholders withers.
5/ What about enfranchisement, which offers such rich pickings for so many professionals?
The key points are that leaseholders no longer pay the freeholders’ legal costs as well as their own; new lease extensions are 990 years; if existing ground rents are reduced to a peppercorn then the cost of extension will be drastically reduced.
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6/ But isn’t marriage value also to be banned?
Yes, and a good thing too. That this nonsense ever got legitimised is an example of the extraordinary imbalance in the leasehold system.
Where there is a short lease under 82 years it is reasonable that freeholders are compensated for the loss if a lease is extended. But there is no reason at all for them to get a cut of half the supposed the uplift in value of a flat once it has a decent length lease.
In the existing regime, there very likely is no profit for leaseholders at all once they have paid the freeholder’s legal costs.
Marriage value calculations, cobbled together by obliging chartered surveyors sucking up to big landlords, are a try-on too far and should never have been accepted in the first place. Their obliteration, by the political party supposedly sympathetic to “business”, is sweet music to flat owners.
7/ What does this mean for people employed in the enfranchisement business?
The outlook is bad and they should perhaps consider retraining. No leaseholder should contemplate extending their lease or buying a freehold while this law is going through Parliament.
Stripping out the completely unnecessary costs in the enfranchisement game lies at the heart of the reform.
8/ But what do these reforms mean for block managers?
If it is the case – as I believe – that this Bill kills off the leasehold business, it means that block managers need to respond to the people who do all the paying: the flat owners.
More sites are going to be self-managed, and commonhold is around the corner. The old business model is busted: no longer gouging out as much income as possible from a block of flats, but serving the interests of the people who live there.
For years the trade bodies in this sector – which have, of course, grovelled to the money – have intoned hypocritically that the leaseholders are their customers, knowing full well that their customers are the freeholders who appoint them.
Soon block managers will be working for the flat owners, and answerable to them as well.
Related posts:
Marriage Value: How your freeholder hitches a ride on the uplift of value on your flat
Marriage value a bogus profit in the £2.5bn enfranchisement racket, LKP trustee Dean Buckner tells BBC
Lobbying alert: Theresa Villiers MP speaks up for ground rents, freehold owners and making sure marriage value still pays off for freehold investors
Metropolitan housing association MTVH tells MPs: we won’t collect ground rent, we have ditched marriage value and all leases are 990 years (where possible)
Parliament told the Property Tribunal ‘stinks’: it lets down leaseholders again and again
Work with this leasehold reform Bill, or wait for Utopia? Minimum: another 3 more years
Self-management may not be the gift many assume. Not without a whole lot more reform than I have seen reported.
Our site acquired RTM some years back. “Dad’s Army” directors, as known by some professionals’, enthusiastically negotiated with prospective agents promising the earth, certainly all the goodies in the code of practice. Happy days were just around the corner.
The true experience of professional agents? One stopped responding to directors’ questions after first year. Had promised an online ‘portal’ for all leaseholders to view finances and directors to see all invoices etc. Never materialised.
Chastened, the ‘board’ enthusiastically sought a replacement and chose one who promised a portal while explaining sadly there would be an extra setup fee. No worries. At least there would be an online portal showing all invoices and bank transactions.
Within months of handover, agent assigned the agency agreement to another agent who advised they did not agree with RTM directors having access to online portal. But we paid for it, directors lamented politely. Access was offered but beset by ‘glitches’ that resulted in no access.
It took years arguing to get access to spreadsheet reports instead. These never arrived reliably but had to be pursued. Like drawing teeth on a crocodile.
Average RTM directors have no clue how to read accrual accounts ( can the average MP? ) and these arrive far too late anyway for management decisions. No company would make money decisions like this. Yet ‘professionals’ and government seem to think dads’ army’ volunteers should sign up to company law obligations, say yes every time to the professionals and not ask questions. Just give full indemnification.
There are, seemingly, excellent online financial portals? Simple amendment to new Reform Act would require ALL leaseholders have access to live online financial portal – able to see all invoices and expenditure, and only have income identifiers redacted to hide debtors- self managing or no.
The internet has arrived, you see. No need to invent new wheels.
Of course this wont happen. No sign of reversing Triplerose and Settlers Court either? No desire to make RTM work, eh?
Paddy,
Your article made for interesting reading. This RTM use well tried and tested procedures all invoices are either by email attachment or hard copies to the Development Manager and at least one RTM Director is copied in. The invoice is approved or other wise by a RTM Director and is sent to the Managing Agent for payment. Copies of all correspondence and invoices are kept in the DM office and can be inspected, copied or photographed by any Resident during the DM normal hours of work at no cost.
The RTM Companies suppliers of communal electric and water can be viewed on line at any time by any Director. We submit meter readings on a Monthly basis and receive copies of the actual bill on the day of issue, the bills are paid by direct debit on time and in full.
All Contractors (all local) were hired or rehired by this Company including negotiation and agreement of the individual firms costs or fees. A full current list of Contractors is held in the DM office. Full copies of the building insurance including cost are posted to the Company notice board along with other Legally required documents. All suppliers and Contractors are paid promptly and in full usually with five working days. Their is no charge to become an approved Contractor at this RTM,
We receive full P & L reports on request which is usually twice per annum, along with copies of the Company’s bank account statements. The proposed service charge budget is always agreed before issue and is essentially set by this RTM with the sound advice of the MA taken on board or included in the budget.
The above arrangements work well for us and may not be suitable for everyone. We pride our selves in being hands on and have found that we have achieved real value for money in return for goods or services by doing business with Local Contractors.
Envious. Our RTM has so far engaged four agents and none have been close to helpful. Promise all you’d expect them to promise but do not deliver. The old saying applies “ignorance is bliss” because they seem to expect the dads’ army directors to know nothing and be complaintl. I understand bookkeeping and accrual accounting and know where to find the bodies. The basic errors these guys make are extraordinary, on top of a wilful disrespect for the client’s authority.
I think they know they can wear down the lone ‘village spokesman’ director who has the temerity to know what to expect and insists on it. It is a combination of industry arrogance and predicable client apathy. Amazes me people volunteeer to be company directors yet never read anything. You can’t manage what you can’t measure and it shows. Sounds like you have an assertive group of willing lessees who know how to manage. My experience suggests the ‘professionals’ will not fill the vacuum if the client is passive.
Paddy,
The Managing Agent of our choice is “Home Management Group Limited” by working together we have achieved a 40% + reduction in service charge in less than two Years.
The reserve fund is the highest it has ever been and our home has never been so well maintained.
I believe that it is absolutely essential that Managing Agents are Legally regulated, and those that consistently fail to achieve the right standard face expulsion.
The current Freehold – Leasehold racket is a magnet for the “Spivs” and “Fly by nights” of Industry and no one should seriously expect those entity’s to self regulate or adhere to any Association code of practice.
I disagree with the comment that people employed in the enfranchisement business face a bleak future, in fact quite the opposite. Also, with each party bearing their own costs, this will strip out unnecessary costs in the enfranchisement exercise
Once there is clarity as to the formula to calculate the lease extension premium, then I suspect there will be a tsunami of claims hitting solicitors and valuers desks. Many leaseholders have held back from extending their leases awaiting details.
Also, any lease that does have a ground rent and is less than say 100 years will be seen as not ideal and with the transaction costs reduced because the leaseholder will not be paying the landlords cost many leaseholders will think it prudent to improve the terms of their lease
There will still be the requirement to argue and agree the following points:-
1) The calculation of the capitalized rent where the current rent is below 0.1% but the ground rent rises and during the remainder of the term exceeds 0.1%.
2) The value of the flat
3) Arguments where the freeholder claims that the premium did indeed reflect the ground rent. For example, if during the purchase there is evidence of an attempted pushback on the ground rent terms, this would be clear evidence that the ground rent terms were considered by the purchaser. By agreeing the contract, it shows that the premium and the ground rent terms were understood and made for an acceptable margin. Therefore, the ground rent was clearly an integral part of the overall consideration.
4) Negotiating amendments to the new lease to make it better security for a lender, many leases have poor wording on key issues such as insurance and enforcing covenants
Turning now to marriage value, this came about in the 1993 Act. At that time, the leaseholder of a flat had no statutory right to extend the term and to reach an agreement which respect the freeholder human rights a formula was agreed whereby the freeholder became entitled to a share in the “super profit” of extending the lease. This profit is of course the increase in the value of the flat after taking away the capitalized value of the rent and the deferment value of the reversion.
I believe that marriage value would not arise in a perfect market; it arises because the capitalization rate and deferment rate are too high. I.e. Marriage value is the result of an imperfect market. There is a very strong case indeed for the deferment rate to be lowered by anything from 1% to 2%. If that was to happen, then marriage value would disappear, and we would have a simply and easier calculation. It is interesting to note that the proposed prescribed rates, whenever they are set, will be reviewed every 10 years. It could be argued that the government is proposing to deal with the inevitable challenge from the Great Estates over marriage value by agreeing to set a rate of say 3.75% to 4% and keeping it at that figure for 10 years
Regarding bringing a claim to the European Court of Human Rights you state “direct statute is difficult to challenge” however counsels opinion given by Catherine Callaghan KC on the subject of human rights did not touch on this point. James V United Kingdom was a case bought after the Leasehold Reform Act 1967
The 1993 Act as noted above gave leaseholders of flats a right to extend, and a formula was agreed. It was in the public interest to interfere with the contract and give lessees that right but was balanced by compensation.
The Building Safety Act varied the powers of the lease, and this was considered to be in the public interest.
However, the proposal to interfere with the payabilty of a rent, to relieve 95% of leaseholders of the obligation to pay on average 78 pennies a day without any compensation to the freeholder, is not in the same league as the issues that caused the 1967, 1993 Acts to be passed. The fact, it would cause the world to be concerned about our world-class legal system on contract law, with comparisons being made with Zimbabwe dealing on farmlands . Such concerns would most certainly not be in the public interest.
A great deal of work has been put into this proposed bill and Michael Gove, to use his famous quote, “have had enough of experts” rushes out a consultation undermining the Bill or it is a knee-jerk reaction to the appalling by-election results that the Tories have had recently. A cynic may say that it is an insincere attempt to try and win favour with an important group of voters – leaseholders. I think leaseholders will see it for what it is and view the Tories with yet further contempt.
There is a lot in this Bill that needs to get passed and there is strong cross-party support to help it through , but these proposals on capping of rents and abolishing marriage value could well derail it, if lack of parliamentary times does not get there first.
“A cynic may say that it is an insincere attempt to try and win favour with an important group of voters – leaseholders. I think leaseholders will see it for what it is and view the Tories with yet further contempt.”
If it were just a case of rip off charges and ground rents, then leaseholders would have been up in arms over granny flats over 15 years ago. It wasn`t in their interests then. Nobody was interested. It`s a culmination of serious bad practice and greed which has bought the leasehold market to a standstill with overcharging, onerous ground rents , onerous commmissions, feudal protectionism and the final nail, (Grenfell associated) Building Safety Act. The building industry and the nefarious FH`s it serves has brought itself to this position (irrespective of marriage value or reversion value arguments). Nonetheless, govts aims to reduce, as best it can, these income streams. Rightly so. It`s karma, it`s payback time.
The leaseholders aren`t interested in fairness to any party, they will ditch one over the other to get the changes they want. No contempt involved. The contempt will be for inaction, whoever they side with.
My worry for leaseholders is it either by design or incompetency that a consultation is required in the GR value reduction, so close to a Bill going through the parliament. One would think that the complexities of the argument, like you have argued, would have been well thought out beforehand. All seems a bit last ditch but it`s all the LH have to hold onto. Maybe this is where you think contempty will arise.
These reforms in the Bill are going in the right direction to seperate the income streams from the ownership. Mind you, even with zero ground rents, the reversion and marriage value could still be a significant sum for many short-ish leases, with property prices being so high. This is also half the problem, the ludicrous rise in property prices adds more value to the Mr Ten-Percenters, such as managing agents, estate agents and freeholders. But anyway the Bill is designed to severely impair monetisation and restore the leasehold sector back to a saleable asset, despite cladding issues unresolved.
Personally, I do not think the freeholders will overturn a statute law that easily. I think the game is up. But there`s a ton of BTL investors hoping the Bill can increase their profits and decrease their exposure to costs. I think they will disapointed as I can see govt. setting GR at 0.1% of lease value. But even that could half a lot of GR charges straight off the bat. Still, if govt do introduce peppercorn, those with the newer 999 year leases then the LH can throw out the FH with little to no cost!
Service charges will always be an issue. There will always be non payers or arguments over costs. I just think cooperative sort of decision are ripe for argument, hence me living in a freehold house! With forfeiture in place, will the LH run management companies force forfeiture on non payers like the FH`s do? Despite the challenges of running their own blocks, will the lower costs be welcomed over the hassle of running them? Maybe it will be let to those more concientious of finances to run them for the majority.
I`m guessing the likes of Consensus that have loans leveraged against future RPI increases will take a massive hit. Maybe the loan recals will finish them off, hopefully. It`s only going to affect individual wealth rather than the markets. Also, leaseholders will have more disposable income and for working classes, almost certainly spent in the economy rather than siphoned off to the B.V.I. trusts.
Lots to think about. But the billions wiped from Vinny`s income stream is what make me smile most!
I remember the graphs of relativity during my process of lease extension. I was astonished that the graphs based on opaque methodology could ever have been accepted as a basis for calculating marriage value (putting aside the justness of that concept).
At work, had I produced such graphs, scarcely backed by empirical data, I would have been laughed out of the room. However, in the magical kingdom of lease extension and enfranchisement they were treated as gospel and I am much poorer as a result.
The charlatans who created and profited from this system will not be missed.
It is to be hoped (?) the reforms will finally kill off the bizarre endless deliberations at upper tribunals on valuations and which graph is applicable. Only in the world of leasehold.
The ” property title” is chosen by developer and used in first registration at Land Registry.
What the public does not know is that “first buyer of new flat ” contributes 100% turnover and becomes long term rental tenant, but after site completion , the freehold title is sold to ground rent company . This means “developer” receives 100% sales turnover , including 97% from flat buyers and approx 3% from ground rent company.
If buyers have contributed 97% in sales turnover, the building should belong the buyers and the 3% paid by ground rent company for freehold title is a serious legal mistake . LKP should ask all MPs in Parliament to help DLUHC , to correct their mistake and return the freehold title at peppercorn sum to the leaseholders .
Two things that are wrong in this article.
(1) Marriage value is legitimate. What is not right is the way it is not set in stone at a given lease length, and the way the current system has worked which is to say that marriage value payments to freeholders can only ever rise at a given lease length, they cannot fall, which means that they have risen massively over 30 years when they should not have.
(2) Some people should extend or buy their freehold now, not least if the lease is about to drop below 80 years or if they want to do structural works and they know the freeholder will make things hard or expensive.
It is also worth noting that there are zero guarantees that the law will be changed before an election, and no guarantees that legislation will be a priority of a new government.
I think there is one thing that we can all agree – if in a month or two the Tories think calling a snap election in their interests they won’t say “oh no, we can’t, we promised leasehold reform and we’re not calling an election until it’s done”.