By Harry Scoffin
Yesterday The Telegraph exclusively revealed that the next Labour government will change the law to give relief to existing leaseholders with monetary ground rents.
Labour has adopted the Communities Select Committee proposal of regulating ground rents to 0.1 per cent of a property’s current value, up to a maximum £250 per annum.
Exclusive: Labour pledges to cap ground rents ‘for all leaseholders’
A Labour government would restrict property ground rent for all leaseholders in a move that goes far beyond the current government’s planned reforms, Telegraph Money can reveal. There are more than four million leasehold properties in England, but many have unfair charges and restrictions demanded by freeholders.
LKP chief executive Sebastian O’Kelly said:
“It is an excellent proposal. Ground rent has no service whatsoever. It has been foisted on leaseholders by developers, to their detriment.”
Also speaking to the paper, shadow housing minister Sarah Jones commented:
“Ground rents are money for nothing. The scandal of rapidly increasing ground rents, paid to freeholders who offer no service in return, must end.”
The ground rents cap will feature in Labour’s New Deal for Leaseholders, out tomorrow.
The move is expected to put pressure on the ruling party to better its own policy offering on leasehold.
Government has so far failed to move beyond its much-criticised voluntary public pledge with developers and freeholders.
However, according to last week’s response to the Communities Select Committee report, government has not ruled out retrospective legislation to remove onerous ground rents:
“The Government understands the difficulties and frustrations for existing leaseholders who are unhappy about the amount of ground rent they are required to pay and feel their leases should be changed.
“As the Committee has recognised, there are many considerations in thinking through the implications of new legislation which would interfere with individual contracts, for instance taking account of Article 1 Protocol 1 of the European Convention on Human Rights and the principle of legal certainty.”
Sharp inter-party rivalry for the leaseholder vote will be played out in the Commons on Thursday, when MPs will get their first full debate on leasehold in many years.
The Backbench Business Committee has agreed the debate as a response to the MHCLG reaction to the Communities Select Committee report. MPs will be discussing a motion on leasehold reform.
Clive Betts MP, the chair of the Communities Select Committee, is set to open proceedings.
LKP asks leaseholders to request their MPs attend the event. They are advised to highlight that briefing notes can be obtained by emailing LKP chair Martin Boyd.
So a deal Ian put on the table where the developer wants £x for the premium and a annual payment of say £350 per annum doubling every 25 yrs for a year of 125 yrs
It is clear that the ground rent is for no service at all and is therefore a liability and this needs to be factories into any negotiations
The prospective purchaser reviews it with their solicitor and surveyor and terms are agreed and the deal struck
Elsewhere some scoundrels hoodwink some purchasers and dupe them into signing 10 year doublers
The remedy it appears is that all ground rents should be capped at £250 – it’s hardly a fair and imaginative solution to a problem and presumably is going to struggle with the requirements of the human rights legislation – as I have said on countless occasions a near hysteria sterns to have broken out
It is all due to the failure for purchasers to reflect on the liability of paying a rent of £x per annum which is for no service – going forward that liability needs to be quantified using a prescribed discount rate so buyers know what they are walking into
So a flat may we’ll be advertised in future at say £225k and on completion they pay £220k but live with the knowledge that going forward they have to pay £250 per annum in rent which is equivalent to a debt of some. £5k
You’ve just repeated arguments (yet) again, despite them being debunked every time.
– £250 cap can be justified with human rights legislation (see Select Committee enquiry)
– Select Committee enquiry stated problems are not due to a failure of the purchasers
– there is no discount for leasehold (see APPG report posted previously)
Stephen, I respect your persistence.
As you effectively suggest, a GR doubled every 25 years starting at £225 for 99 years would capitalise to £5127 (at 6% yield), or £6790 (at 5% yield).
Who would pay to decide the yield rate in every sale?
Anyhow and besides, what housing market do you operate in? We know leases are not discounted but sold at the best price the market will achieve.
For your theory to work, the seller would have to reduce the agreed price by the capitalisation value. When would this happen?
Buyers use every means available to reduce the agreed price, and with leasehold they have plenty of means.
A neighbour recently got a sale with a lease extension paid for by the seller but achieved less than another flat realised without a lease extension.
At the last minute the buyer of the extended lease apparently noticed that the new extended lease did not allow subletting, so the hapless seller went back to the freeholder and paid another wedge of cash for a second variation to keep the sale rather than start again.
Nowhere in the pixie-free world of hard nosed property selling could anyone work to your system, far as I can see. But I’m not the sharpest knife in the drawer.
Apart from the anyhow and besides which above, the seller does not get the ground rent anyway. That goes to the freeholder.
So why should the leaseholder seller reduce the asking price to allow for the ground rent payable to the freeholder? For this to work scientifically surely the seller would in turn have had to have benefited from a reduction in their own previous purchase price for the capitalised GR debt? All the ways back a bits? And that would work consistently well of course?
Let’s take a quite typical case: –
A developer sells a flat for say £350,000 on a 125-year lease with a ground rent of £350 that perhaps doubles every 25 years. The terms are made clear at the time of purchase and the purchaser acknowledges the liability by signing the lease. The obligation to pay the rent is part of the overall consideration the developer gets for the property. It is indeed for no service and that is why the lessee should consider the obligation in conjunction with his professional advisors. Those advisors ignore the modest amount of the rent and in this example its capital value is around £10,000. The lease is a triparty lease and the lessee is a member of the management company that controls the building. Life carries on for some years.
Then elsewhere in the land a developer drafts leases which catch lessees out – the solution it appears is to reduce the current ground rent on all properties to a maximum of £250 without compensation. So the freeholder in the above example does not get the consideration he thought he was getting when he sold the lease.
The justification for circumnavigating the human rights legislation seems to be solely to save the lessee from paying the correct amount of compensation. The Labour party and the Select committee continue to advance the argument that the ground rent is for “no service”. They do not accept that the payment of the ground rent was an integral term of the consideration and perhaps more importantly a promise from the purchaser to pay and agreed sum made under the watch of professional advisors. If property prices are traded at little or no discount because of the imposition of a rent how does that justify the landlord not getting his stream of income. This has arisen due to the failure of purchasers to adequately consider what is put on the table in front of them. If they make a poor judgement on the price, why should the vendor have to unwind the contract to correct it when the sums involved are modest.
We accept in our free economy that we pay a price in excess of what it costs a vendor to supply goods or services and this is of course called a profit. This is exactly what the developer has done when he sells the property by reserving a rent – he is seeking to maximise his profits. Therefore, if we alter the terms retrospectively on leases in respect of ground rent we then open the floodgates for all sorts of claims for retrospective adjustments to other contracts.
Under Labours proposal a lessee on the Grosvenor Estate living in a £5m flats with a 30 year lease and a token rent would get a lease extension for £50,000 when the previous price would have been around £1.5 million. If the lessee bought the flat a few years ago they would be handed a huge windfall gain which would not be shared with the lessee who sold it a few years earlier. By abandoning Human Rights legislation such a windfall would arise and is it equitable that it should be handed in its entirety more or less to the lessee who purchases the property a short time before the legislation changes
Human rights legislation has a clause in it which allows government to act in the wider interest. It is not solely about paying the correct compensation.
Human rights act is not being circumnavigated (see the Law Commissions proposals).
Any compensation can easily be based on actual price paid (not projected). In the free economy investments can go down as well as up (see the effect of Brexit, dot com boom, etc, etc).
Windfall is handed entirely to the lessee, in other words the person who paid the full price for a property is the person to benefit. That’s a good thing.
Stephen, your comment is rather revealing.
You do not address the absurdity in practical terms that leases are or could be discounted for the capitalisation of the GR.
Now you merely argue that it is the right of the developer to make a profit using ground rents? The truth has emerged, no? Ground rents are profit. A profiting income stream from home ‘ownership’ so called.
At least we can at last dispense with your theory that GR would ever be discounted from the maximum achieveable sale price of a new lease.
The developer would be denying themselves the very profit you now claim they must be free to take unfettered by any law.
And if the new lease is never discounted, why would the next assignee discount the sale price for something what they cannot receive anyway?
Perhaps we will hear no more hereabouts of discounting?
As for windfalls, what say you about freeholds bought at auction for a mere fraction (less than 3% in cases) of the development market value, thereby granting the new investor, wheresoever in the world they operate, immediate windfall for building units on top to lease out, and for lease extensions, consents etc?
Under RTM the freeholder can charge ‘no objection’ fees even when doing nothing to consider the consent.
Windfall is alive and kicking in leasehold already. To the minority investor ‘landlord’.
What about the situation where the freehold has been sold on ? A 3rd party investor gets it for say £3000 but then demands £30,000 off the home owner for them to enfranchise. Pure speculation and blackmail by the investor who has added no value, and must recognise the value of investments can change. The home owner is trapped in a property he cannot sell, or afford to enfranchise.