LKP’s responses to this have come courtesy of the Guardian:
Radical plans to end huge costs of buying a freehold unveiled
Millions of homeowners caught in the so-called “leasehold trap” may be able to buy their freeholds at a fraction of the price currently demanded by ground rent companies, under radical proposals from the Law Commission. One proposal is for a simple formula where leaseholders will pay just 10 times their current ground rent to convert their property from leasehold to freehold.
The leasehold system is a money-making racket. Reform is long overdue | Sebastian O’Kelly
This week, the Law Commission fired the opening shot at the murkiest and most lucrative corner of the residential property market: the leasehold system. Leasehold simply means long tenancy and it is unique to England and Wales.
Justin Madders MP said:
“While there are a number of welcome measures, these proposals represent little more than tinkering around the edges of a deeply unfair system.
“Too much emphasis has been put on defending the interests of freeholders. Nothing in the measures proposed reflects the fact that some of the biggest and most wealthy developers have exploited their position to rip-off leaseholders.
“The only option with the potential to level the playing field is a simple formula to calculate the value of the freehold. Adopting a more complex system as the proposals suggest would perpetuate a completely unbalanced system, which would continue to allow freeholders to game the system for their own benefit.
“Ultimately this entire process looks set to fail at delivering fairness to leaseholders, because the terms of reference require the Law Commissioners to ensure that ‘sufficient compensation is paid to landlords.’ The Government is in danger of falling at the first hurdle if they back down when confronted by vested interests.
“If we do not see a more robust proposal in the September consultation paper, I am putting the new Housing Minister on notice that I will seek to use every parliametary measure available to deliver justice for leaseholders.”
How families are STILL being lured into buying homes that may not sell
Homebuyers are being locked into controversial leasehold contracts on newly built properties with this type of sale soon set to be banned Catherine Gale, 44, fears she faces a huge loss on her three-bedroom house outside Bolton She says homes on the estate have sold at tens of thousands of pounds less than their original price Homebuyers are being locked into controversial leasehold contracts on newly built properties – just weeks before this type of sale is banned.
Radical proposal to make escaping ‘leasehold trap’ easier for homeowners
A radical proposal to make it easier and cheaper for homeowners to escape the so-called “leasehold trap” and buy the freehold of their houses has been put forward by the Law Commission.
Related posts:
Daily Telegraph reports the new-build leasehold houses ban 
Daily Mail on leasehold houses and doubling ground rent scandals 
Disgraceful leasehold houses reported in Guardian today 
Leasehold houses to be outlawed, says the Daily Mail 
Ban revenue-generating leasehold houses, says Justin Madders MP. Redrow responds
Government leads (with their remit) and The Law Commission is only too happy to oblige.
Forgive me if I make no comment.
Justin Madders proposes a simple formula of 10 YP and believes that this will adequately compensate the freeholder for the loss of income and the reversion. The basis appears to be that this is a multiple used in the past to remove very small rents of less than £5 in Ireland and Scotland when interest rates were a great deal more than they are now. Further it should be some sort of punishment for past wrongs
This simplistic formula fails to address the value of the reversion
Today with internet access and computer models it would not be very difficult to produce a model so that the variables of the ground rent and value of the flat can be input in and based on the thousands of Tribunal cases in the last 25 years a valuation produced binding on each side saving thousands in valuation fee for the lessee. Very high end properties may have to be excluded and dealt with as before
Except past transactions have been based on mathematical models commissioned by London’s leading freeholders, such as Grovesnor Estate commissioning the Gerald Eve model.
That was demolished in the Parthenia case and Savills has come up with an even more landlord friendly replacement.
Because landlords and their ever obliging professionals have rigged enfranchisement and lease extension valuations they need replacing with a set multiple of ground rent.
This means arguments over valuation end.
If a ground rent stream has say 89 years to go and pays £250 per annum fixed under Justine Madders formula the landlord would receive £2500
The landlord would be unable to generate £250 per annum consistently over 80 years . Therefore Justin Madders fails to adequately compensate the freeholder and that is in respect of just the income not the loss of the reversion
A more accurate way would be to take the rent deduct a reasonable collection cost and then discount the rent using rates more akin to the value of gilts. So very small rents may end up being worth 10 yp or less
There is a difference between gilts and residential freeholds in English law: a group of private citizens can compulsorily purchase the freehold off another private citizen. They cannot do that with ownership of gilts or other assets, thank goodness.
This principle has been established since 1993, in spite of the late Duke of Westminster’s intervention in the Lords.
Revenue streams inserted into people’s homes are already compromised by enfranchisement.
It is one reason, among many others, why residential freeholds should NOT be rated triple A investments (NB Rothesay Life; Bank of England).
The point I was making is in respect of part of the compensation to be paid to the freeholder to avoid a challenge under the human rights act
That stream of income to which he is entitled to after collection costs is risk free and should be costed off from a starting point of the yield on gilts plus a risk premium . The risk premium has been subjected to much debate in the tribunals and based on those decisions a risk premium can be calculated
Plucking 10 years purchase out of the air makes the calculation cabalne of being done without a calculator but is hardly fair and does not stand up to any analytical analysis and is delivered with treats and hurt over past wrongs.
If a rent is clearly set out in a lease then the purchaser of the leasehold interest must step up to the mark and pay – to suggest afterwards that it is all unfair and unreasonable and should be extinguished on payment of a small and wholly unrealistic basis implies the lessee has not understood the simple term of the ground rent or is seeking to wriggle out of a contract by pointing to wrongs conducted by other parties on other property
Well, I am sure similar arguments were heard in Scotland and Northern Ireland regarding the Human Rights Act when they introduced set formulas to buy out residential freeholds.
The repugnant leasehold commercialisers have resorted to the Human Rights Act in the past, as when this barrister ejected Martin Boyd and Sebastian O’Kelly from Wandsworth County Court on these grounds during a forfeiture application.
That is, the human rights of the person this barrister was attempting to render destitute and homeless.
Stephen – Our freeholder is also the managing agent. They make enough on the service charge already. We could go RTM and get a new managing agent. The freeholder currently does nothing for his annual ground rents. The Madders proposals seem very fair and reasonable, the only reason England and Wales are out of step with the rest of the world is the malign influence of powerful freeholders. I accept that freeholders should be compensated for their loss, but not overly compensated. Leasehold flats in my area are declining in value because of excessive service charges, lenders taking this into account when giving mortgages, and all the complicated wrinkles surrounding leasehold. It is in the freeholders interest as well to adopt a more modern, fairer system, because declining flat values encourage more transient residents who will take less care of a building.
Stephen is arguing for fairness for freeholders. Since when did often offshore tax haven based freeholder argue for fairness for leaseholders?
He tries to come up with as formula that will serve to protect the assets of the freeholder/
What Stephen has never explained is as to why a freeholder based offshore in a tax haven who pays approximately 10% of the total development value should make any profit from those that fund the other 90%?
McCarthy & Stone and Churchill Retirement bleat that “We need ground rental income to subsidise the costs of retirement developments” And yet McCarthy & Stone felt able to gift an asset recently sold at £29m(according to LKP) or £31m (according to About Peverel) and Churchill Retirement are offering to pay purchasers stamp duty at present.
Well, if they can afford to do that they can damn well afford to drop the ground rent!
Stephen, as expected, is not simply arguing for “fairness” for freeholders , at the top of this exchange with Admin he seems to argue they should be absolved of their “past wrongs” as well.
I believe all involved in this long and arduous campaign for “fairness” for leaseholders in England & Wales look forward to the September report of the Law Commission (incl. flats) and, immediately following, a bill in parliament to be presented by Justin Madders MP. with cross party support.
And a bill where the “past wrongs” of the unscrupulous who have long been engaged in the illegal purchase of freehold titles without prior knowledge of qualifying leaseholders in breach of s4A of the LTA 1987 (as amended by the Housing Act 1996) are fully addressed, in “fairness” to the victim leaseholders.
10 x GR seems equitable..
Here is an idea that may be “fair” to freeholders?
Compensation should be based on a ground rent that is no more than 0.1% of the purchase price of the property, and also based on what the freeholder pad for the freehold from the developer?
So if two years previously a speculator paid £5,000 for a freehold, the compensation should be in those environs? Future speculative profits should not really form part of the equation if the freehold has been transferred within the previous 5 years.
Further more, any compensation should only be payable if the freeholder is domiciled within the UK for tax purposes.
Short term leases. must automatically be extended by the statutory 90 years (based on the 0.1% ground rent formula.
Legal fees for enfranchisement or lease extensions should be capped (or at a fixed price) with both sides liable for their own legal costs (with the exception of vexatious action by either party)
So if a lessee bought a flat 40 years ago with a ground rent of £10 per annum and sells it today for say £150k with its very short lease to an investor. Then if Madders bill becomes law the investor can extend the lease for. £100 and the flat would be worth say £200k a £50k improvement overnight.
Is that a fair result to the lessee who recently sold the flat? Is not Madders bill going to help line the pockets of get rich quick types buying short leases from those unable to afford to extend
In the past the lessee would have served a section 42 notice and assigned the lease with the benefit of the claim and got a share of the marriage value – this would not happen in the world envisaged by Mr Madders
Leasehold is a complex matter and solutions need to be thought through carefully taking regard to all parties
The appeal of a quick 10 YP formula is clearly attractive to those with short leases but hardly addresses the rights of those parties who hold the freehold – a 60 year lease in a flat London W1 worth say £3m on a ground rentbof £100 could be extended under Madders proposals for £1k as opposed to £360k notwithstanding the lessee may have only recently bought the property – it can hardly be surprising that there would be an enormous challenge from those who own the freehold who have the wealth and connections to argue their case
The climate for change is clearly there but to advance outrageous proposals will if anything play into the hands of those who want no change
Stephen, you seen to be living in La La Land. My ground rent was £15 per year. When the lease dropped to 55 years in 2013 I extended it at the not insignificant sum of £9500 plus legal fees. I would be lucky to achieve £50,000 if I sold it. Why ?, because as Simon states the other flats in the area are decreasing in value due to short leases as people can’t afford to extend. A third of the flats on my estate are now buy to let, and the place has fallen into decline.
In the North East there are entire towns made up of leasehold houses and flats which are unsellable, just check out Cramlington in Northumberland for instance. Nice little flats which would suit downsizers or people on low incomes, but are unmortgageable. Even investors are turned off buying an asset that won’t increase in value. How does this situation solve the housing crisis? Properties are just standing empty with little prospect of ever being sold..
To illustrate the problem with Justin Madders proposal I set out the following example which would be common in London
A flat in say Mayfair worth £5,000,000 held on a under lease with 60 years remaining paying a rent of £100 per annum to the head lessor. The head lessor pays a peppercorn rent to the freehold.
In an enfranchisement the head lessor would receive around £2,500 The capitalised value of the rent and a small amount of the marriage value. The freeholder receives the value of the reversion of around £270,000.
Under Justin Madders proposals the lessee would pay just £1,000 and head lessor would get £1000 instead of £2,500 (for the loss of rent) and the freeholder nothing at all instead of £270,000 for the value of his reversionary interest
It is inconceivable that the freeholder would not be able to claim successfully that he is deprived of reasonable compensation for the reversion and for absolute certainty there would be a claim from the Prime London estates.
Many point to the position in Scotland and Ireland as to how very small rents were capitalised at 10 years purchase when interest rates were much higher. There being no reverison (a very important point) They conveniently overlook the rate used to capitalise rent charges . Rent charges are extinguished from August 2037 and the rent up to that period is discounted at the rate of the National Loans Fund for stock of 30 year duration and the interest rate is set by the UK Debt Management Office . That rate is….1.78% i.e. 56.2 YP
It is clear that the White Paper is setting out a range of solutions based on input from stakeholders so far. They have already indicated in the White Paper that they would have difficulty running with Justin Madders proposal as it fails to address the human rights of the freeholder. Equally ridiculous is the idea that the lessee should pay 10% of the value of the property for the freehold. This would work against the vast majority of lessees of leasehold houses
Over the last 25 years a model of valuation has been refined and understood following of thousands of cases bought to the FTT/LVT . This data should be capable of being formularised and a valuation model developed to be put on to a Government web site to apply to all but the most expensive properties and for those properties which have at least 50 years remaining. The lessee would save significant legal cost and time would be saved and it would be easy to understand
Arguments will of course be advanced that freeholder have no human rights due to the wrongs of a few. Or that as they are based abroad should not have any property rights over UK property. Further some will argue that leaseholders had no option but to sign up for leases reserving a ground rent or failed to understand what they were doing. Or the ground rent is for no service and should be abolished anyway. These arguments are all rather weak when standing against the legal principal that a contract was entered into over a period of several weeks and that the terms of the contract should stand. Unless the terms are poisonous or the lessor induced a lessee to use a solicitor who would not act in their best interest.
Much of the passion from those that want to see Justin Madders simple formula being adopted is driven by wrongs inflicted on them and there have been significant changes to help them gain redress i.e. RTM and the introduction of the LVT and FTT over the last 20 years and there will be further help. But supporting a 10 YP fits all valuation will be seen as retribution and will not be capable of critical analysis in the light of arguments over human rights
In existing provisions of the LTA 1987 (as amended by the Housing Act 1996), when freehold title passes to a purchaser without prior knowledge of existing leaseholders in breach of rights of first refusal (RFR), the act provides that the majority of qualifying leaseholders can force resale to themselves “on like terms” to the original disposal. In such cases, as no proper notice (s5,s3A) has been served on leaseholders, leaseholder rights continue in abeyance without time limit and it remains the continuing duty of the “new” purchaser to serve proper notice.
Taking up on Michael’s point above, it seems to me that this part of existing legislation could be adopted to cover all title transactions (whether legal or illegal) so that existing leaseholders (houses or flats) can obtain full title through existing “like terms” legislation; subject only to Justin Madder’s 10 x GR route, whichever is the less.
Are you suggesting that where Section 5 have been served and the lessees not take up their rights at the time that legislation now be passed retrospectively giving them a further opportunity to accept it.
Stephen. You say the freeholder in your example would receive a reversion rate of £270,000. How much would the freeholder have actually paid initially to be eligible for that entitlement?
And why would those that live and pay for the property not be entitled to own that property?
I am all for “fair” compensation. But it should be based on what was paid and not future earnings.
It is time for the freeholding snouts to depart the trough..
When the lease terms were agreed it was made clear in the lease that it was for a defined term and therefore the freeholder should expect to receive the property back .
If that agreement is to be broken by the lessee it is to be expected that the freeholder be compensated
Care needs to be applied otherwise an Assured tenancy of say 12 months could see the tenant getting the property for 10 times the rent
Stephen, you are attempting to muddy the waters. As you are well aware, existing LTA legislation is very clear so that where a s5 has NOT been issued, and the subsequent title purchaser fails to issue a s3A notice), qualifying leaseholders have a continuing right to force resale on “like terms” to the original disposal.. And this right continues without time limit.
In your post you stated:-
Taking up on Michael’s point above, it seems to me that this part of existing legislation could be adopted to cover all title transactions (whether legal or illegal) so that existing leaseholders (houses or flats) can obtain full title through existing “like terms” legislation; subject only to Justin Madder’s 10 x GR route, whichever is the less
So where a section 5 is served and not taken up that would be a “legal” transfer but you still wish for lessees at a later date to acquire at that same price or at Justin Madders whichever is the less..
I am not disputing cases where Section 5 have been overlooked that lessees have a continuing right to claim the freehold
I really hope that a law comes into place to protect the hard working, ordinary people who are going through absolute hell at the moment. Myself being one of them.
People are suffering huge anxiety and emotional stress at the hands of landlords who can exert their power over the homeowner at any time. Many people as we know are finding themselves with a property which is not a place of sanctuary any more, but a bloody nightmare which they have to live each day. They are not able to enjoy normal life through worry and a bit of embarrassment at getting themselves into this position. I am not thick by any means, but I feel really stupid about getting myself into a position where I can be held to ransom by someone else and that person being able to put my very financial security in jeopardy.
Many properties in the North East are completely devalued and unsaleable. How is that right and for what – so that the rich can get even richer? Do they really need yet another designer handbag or another exotic holiday? Probably not.
All we want is a fair deal to get on with our very ordinary lives without worrying every day about the cost of buying a freehold or extending a lease just to have some security in our lives.
I hope a new law stops all the greed.
Crispin Blunt MP, ““Titles to people’s home is demonstrative of their ownership to their home that is to serve as a physical shelter and emotional safe haven for the family. Shelter and security is a fundamental need”
Very well said Gillian. Stephen uses London examples which is a different world to other parts of the UK. It is not even in freeholders interests where flats are declining in value because of poor service, excessive service charges, and the toxic issues with leasehold. Mortgage providers are much more cautious lending for a leasehold property for all these reasons. I am sure MPs who represented the rotten boroughs gave similar justifications as to why only the rich and connected were allowed to vote at that time. A much cheaper, less complicated system is needed for the benefit of all.
Government may pass legislation with retrospective effect, one example being the War Crimes Act 1991. England and Wales are part of the UK therefore to not disadvantage or impinge on the human rights of leaseholders living in England surely they should have access to the same rights as leaseholders in Scotland and Northern Ireland ?