Changing doubling ground rents to RPI allows a quick sale or enfranchisement but loads the freehold with revenues
My 250-year lease with doubling ground rents add up to £1.9 million, but RPI ones add up to £25 million!
Communities Select Committee needs to haul in the housebuilders
By Joanne Darbyshire
I bought my home from Taylor Wimpey in 2010 and it has one of the now infamous doubling ground rents.
Please note that Taylor Wimpey are not the only developers to implement doubling ground rents; Countryside and Persimmon are also offenders. Taylor Wimpey and the ultimate owner of my freehold, Long Harbour, would like you to believe that this is no longer an issue as they have kindly set aside £130 million to rectify the problem.
They will contribute £750 in legal fees for me to convert my doubling ground rent to RPI. Problem solved right? Well, actually NO.
I’ve reviewed the offer that’s being made and want to explain why making the decision to convert to RPI is by no means a “no brainer” and far from an ideal solution to this problem:
Under the terms of my current lease the ground rent doubles every 10 years for 50 years, by which time it will be £9,440 per annum. It then remains at £9,440 pa for the remainder of the term of the lease and the ground rent paid over the full term of my 250 year lease is a staggering £1,979,450.
The proposed new lease terms increase the ground rent by RPI every 10 years for the full term of the lease.
The last published annual figure for RPI was 3.3%. Sure, under RPI increasing terms, the first few increases are more modest than my current doubling lease, with ground rent being a mere £1,500 after 50 years, but would you like to guess what the total ground rent is over the 250 year term? £25,758,709.
And if RPI was 5% for the term of the lease, a jaw dropping £930 million.
Compound interest is a hard thing for people to get their heads around and the impact of the compounding in the later years of my lease leads to figures that are truly horrific.
So, if I decide to convert to RPI, I’m trading short term gain (in ground rent terms) for long term pain and kicking the ground rent bomb down the road.
Who knows what RPI will do in the future?
The Office for National Statistics published an excellent article on March 8 this year on the shortcomings of RPI as a measure of inflation: “In 2013, the RPI lost its status as a National Statistic. Our position on the RPI is clear: we do not think it is a good measure of inflation and discourage its use.
“There are other, better measures available and any use of RPI over these far superior alternatives should be closely scrutinised.”
They also said “the evidence suggests it is likely to overstate inflation”. If RPI reaches 7.18% pa this is the equivalent of doubling. Given that context, housebuilders and freeholders should be challenged on why RPI increasing ground rents are acceptable.
This is a conditional offer.
In signing the Deed of Variation I also have to sign a Deed of Settlement which involves me signing away my rights to claim further from Taylor Wimpey and may also prevent me from giving evidence in any future class action against Taylor Wimpey or at the much needed Government Select Committee Inquiry into the leasehold scandal.
Clause 5 in this Deed of Settlement buys my silence.
Make no mistake, this offer is an exercise in limiting Taylor Wimpey’s corporate liability.
My solicitor, who is specialist in leasehold law, has asked Taylor Wimpey to simplify the schedule in the Deed of Variation that explains the new ground rent terms as it is so complicated she is struggling to understand it. Taylor Wimpey has refused. She also advises me that the undertaking she has to sign is unnecessary.
It will make enfranchisement cheaper, for those trapped in this mess that can afford to buy the freehold.
Please note that there will be thousands of people for whom enfranchisement is just not an option; regardless of what measures the current Government take to make it more affordable.
There are many posts from people in the National Leasehold Campaign Facebook group whose ground rent has already doubled who are struggling to make ends meet.
These people will remain subject to the horrific ground rents referred to above.
In my case, if I convert to RPI, it should bring the cost of enfranchisement down from £23-33k to somewhere in the region of £11-13k.
Legal fees will be about another c.£3k as I not only have to pay my own legal fees but those of the freeholder.
Compare that to the £4,425 I could have bought the freehold from Taylor Wimpey for at the time I purchased the house if I had been properly advised by their sales people and the conveyancing solicitor that they recommended.
I understand that the Law Commission is looking at making enfranchisement cheaper and easier.
Freeholders are already anticipating changes and we are seeing a flurry of informal offers to leaseholders of new build homes (which tend to be what we call fleecehold offers – money making permission fees are left in the transfer with fees for home alterations, remortgages, even permission to have a pet!).
Informal offers are tempting but fraught with risk.
We are also seeing a big increase in cases going to tribunal with the freeholders hurrying to set case law precedents for low capitalisation rates that will make buying freeholds more expensive.
Precedents exist in Scotland and Ireland for freeholds to be made available for a simple multiple of ground rent.
The whole tribunal system for property is corrupt and broken and needs to be urgently addressed.
There is the possibility that doubling ground rent terms may be ruled unfair contract terms and struck off. If I’ve converted to RPI where would this leave me? Potentially worse off?
Taking the decision to convert to RPI is not all all straightforward. If you were me, what would you do?
Please use your influence to press for a Government Select Committee Inquiry to hold those responsible for creating this mess to account.
There is no need to wait for the outcome of the Law Commission work – we need answers NOW as to how we’ve got here.
A number of people are going to convert to RPI without realising the full consequences and all key influencers and media need to understand that the Taylor Wimpey Ground Rent Assistance Scheme does not fix the problem and should not be hailed as the solution.
Joanne Darbyshire is a joint founder of the National Leasehold Campaign along with Cath Williams and Katie Kendrick
Related posts:
Taylor Wimpey more greedy than the ground rent ‘Mr Smallweeds’ (and so are other plc housebuilders)
Pete Redfern tells LKP how Taylor Wimpey will sort the ground rent scandal
All Party Parliamentary Group, April 26: Barratt praised at Citiscape; Galliard reviled at New Capital Quay; Taylor Wimpey scorned over ground rent review scheme
Taylor Wimpey delays ground rent scandal ‘review’ to April, and hopes, like Mr Micawber, ‘something will turn up’
Taylor Wimpey ground rent “assistance” review -update
LKP helps raise £14,682 for park home champion Sonia McColl OBE
For many years the housing market has been rigged.
The rigging process began in my opinion when banks entered the mortgage market and one of the first things they did was to relax the lending criteria. They had worked it out that by lending twice as much would lead to a dramatic increase in house prices (the homeowners would be happy and the banks would profit from lending the extra money)
On the principle that more cash chasing fewer goods leads to higher prices developers got into the act by restricting the flow of new builds.deploying a system known as Land Banking.
It was said to be the brainchild of the Tchenguiz brothers who came up with a scheme that could ruthlessly exploit leaseholders. They found a way,with the help of the banks to borrow over a 150 year period, to value the asset on not just the initial asset price but on the future income the asset could produce.
To finance the interest for their venture they effectively employed themselves as the property manager (and those profits could be passed back.
Initially restricted to flats and retirement developments, it was soon realised that if on a freehold development the common ground could be held on a leasehold basis, money could be made.
The developers cottoned on to this, and so when they sold a freehold house, they retained ownership of the communal land. Service charges for maintaining the communal land could be imposed on the freeholders and however bad or expensive this service proved to be freeholders would be powerless.
It gradually dawned on developers, if they could make a good profit from retaining the freehold on communal land, even more profit could be derived from retaining the freehold on any house they sold. yet another scandal was born.
For those that say “as long as the purchaser is aware of what they are buying their is no problem” I would say that this is to ignore the utter desperation for people to get on the property ladder. It is to ignore that by and large their is no other choice.
It is to ignore the clear conflict of interest where a solicitor “acts” for both parties.
If a solicitor handles 500 purchases on the recommendation of the developer, yes he will carry out the legal purchase requirements but does anyone seriously believe that the solicitor will advise his client not to proceed with the purchase however many pitfalls in the terms ? If he doers he will lose all his developer referrals
Every which way you look at the housing market, it is unfair, it is broken it has become corrupted. It does not serve the national interest. It is not fit for purpose. It must change.
There is actually no difference in the value between a lease with 10-year doubling rent reviews and a lease with 10 year RPI rent reviews. So in this 10 year doubling case it should cost £11k to £13k to buy the freehold plus fees. If a 10 year doubling lease really was worth £23-£33k why are so many freeholders offering a DoV to convert to 10 year RPI for no cost! The most recent comparable evidence of 10 year doubling investments clearly shows this, Therefore, if you are planning on enfranchisement you would be best doing it with your 10-year doubling lease in place and not lose your rights to redress or create a huge issue down the line as you become saddled with a 10 year RPI lease.
I think that the Developers are converting to RPI at no cost just to dig themselves out of the hole of their own making. They promote the idea that it is better for the leaseholders and hope to con the Government into agreeing with it.
Whereas we know both systems are as bad as each other, they eventually become unaffordable and hamper the resale of the property.
And if a RPI conversion was so good, developers would not feel the need to insert a clause disbarring the leaseholder from taking any further action in the future?