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
Without. This post and Facebook groups I would be none the wiser!
Single mum lumbered with a doubling ground rent this year which I am unable to fund! I bought a house which I hoped to pass to my daughter but it’s just a house that could potentially bankrupt her and will never be mine or hers!
Taylor Wimpey and the solicitor who sold me this awful house habe been negligent and sold me an absolute joke of nothing but rented bricks and mortar and land which will never be mine! Wasn’t even told it was a leasehold never mind doubling ground rent!!!
Andrea, “negligent” is not the word. It would take more than one word to describe Taylor Wimpey, and others involved in the great fraud that is leasehold. And none of the words I have in mind would be acceptable in polite company.
This has changed my opinionn of not only owning a new built house in the Uk but my political view also – I cannot believe that this system of shafting hard working people is legal! – The crooks involved in this should be ashamed – but then – you are shameless! – we will fight this until justice is served! – an Englishmens’s home is his Castle! Namaste!
The TW solution to the disastrous problem they have created is completely useless. In the long run RPI increases exceed the original 10year doubling, because they apply to the whole length of the lease.
The only solution (of which I informed them in December 2016) was to buy back the freeholds and sell them to the leaseholders at the price quoted at the initial sale.
I believe their £130million could have covered this, giving relief to the leaseholders and getting TW of the hook.
Instead they tried to be clever hoping to minimise their costs, putting their customers in an impossible situation, and at the same time degrading their own reputation.
Housing Association London and Quadrant and Countryside are offering their leasehold tenants Ground Rent increases of RPI every 10 years instead of doubling every 15 years on 250 year leases!
They say this is a generous offer.
If this Government is going to abolish or introduce peppercorn ground rents why are these charitable Housing Associations and developers now offering a still outrageous change to existing onerous ground rents ? Is there a catch ?
Leasehold has far too many unknown risks and should come with the same warning as any other financial product. Who would have guessed millions in Grenfell style cladding would fall on innocent leaseholders to pay.
My calculations suggest that under your doubling every 15 years regime, over the next 60 years you would pay £22.5k total ground rent for each £100 you pay at present.
The equivalent figure for the RPI option would be £8k for each £100 at present, based on an annual inflation rate of 3.0%.
So it would seem to me to be a generous offer.
Ms. Darbyshire would no doubt question this but for the reasons ‘Stephen’ points out above,l any regime based on RPI or similar index can hardly be unfair to the leaseholder cf. what he/she has agreed at the outset no doubt with the advice of their solicitor. E&OE!
John dear, declare your interest, or more probably, don’t declare your interest.
You appear to have the same scriptwriter as our good friend (not) Stephen.. You suggest, as Stephen has suggested, that a contract is a contract and binding until the cows come home. I neither believe you, nor Stephen, to be stupid, both of you are being wilful, and glibly put false arguments forward in the hope that we are stupid.
A contract is only ever binding if it is FAIR, but of course you know this. There is a lot more that you know but choose to ignore because it would weaken an already shockingly weak case – the defence of our obscene leasehold laws.
I own the freehold of my very modest home. I am interested in this subject only because a friend bought a leasehold flat as an investment and is now trying to extricate herself from the mess she does not fully realise she is in.She should have informed herself as to the nature of leasehold, solicitors, and sellers,suppressed her greed and walked away.
The trouble with the generality of contributors on here is that they think that they alone should profit from their investment. Freeholders are villains , developers are to be pilloried, leaseholders’ tenants are to be exploited.
You choose to make sarcastic attacks on ‘Stephen’ who may or may not be ‘ in the business’ but brings some degree of informed and factual comment to the topic as exemplified by his contribution to this thread above.
As you seem to be an expert in all aspects of housing, no doubt you have actually built some houses and are familiar with the finances etc . of this industry? Tell us of your achievements in this or any other area of manufacture and I may feel you are worthy of respect. Cheers.
For the record, Dear John, Stephen works for one of the Tzchenguiz brothers and is involved with ground rent investments, he is in the trade. For many a month he made contributions on this site without declaring an interest, though it was obvious from his disinformation that he had an interest. Eventually it was forced out of him.
Now to you and your absurd, and frankly, disgusting statement “The trouble with the generality of contributors on here is that they think that they alone should profit from their investment. Freeholders are villains , developers are to be pilloried, leaseholders’ tenants are to be exploited” – which incidentally doesn’t make complete sense, the drift I get. What you should get is a grammar book, and a good proof reader.
This statement is so over the top stupid (I particularly draw your attention to “they think that they alone should profit from their investment”), there is something else you should get after the grammar book and proof reader – a brain transplant.
Are you really suggesting that a lessee was not aware of a ground rent being payable. It cannot be argued that a lessee was not aware that a rent was payable (I can accept they may not have known the future rises and the impact ) but to argue that they had no knowledge of a rent to be inbelivable and all rents should be abolished retrospectively
What would the future be for other contracts where terms agreed – arguing that as you are not legally minded you should then have the terms altered after entering the contract would cast a worrying cloud of all types of contract
The idea that a rent is indexed linked seems wholly reasonable – we fully expect the government to increase pensions in line with the RPI – the same with public sector employees – so what is so fundamentally wrong with a rent linked to the RPI ? Rather than addressing myself and John with “my dear “ put forward some creditable counter argument to this point
The terms of the lease as to the premium and the initial ground rent can hardly be argued in retrospect to be unclear . They formed the basis of the negotiations and should be upheld – please note I am not supporting terms which are unclear or hidden deal into the terms of the lease .
Once more I quote Crispin Blunt MP, TORY member of parliament for Reigate –
“Present-day “onerous ground rents” are, more likely than not, the resultant of UNCONSCIONABLE conduct carried out by one sector of society who have superior information flow (developers, freeholders’ funds, financiers, solicitors) at the expense of an unsuspecting and more naive part of society (consumer homebuyers).”
Further, “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”. I ADVOCATE THAT THERE SHOULD NOT BE ANY GROUND RENT AS PROPERTY TITLE SHOULD BE EITHER FREEHOLD OR COMMONHOLD”.
I now move on to quote Michael Hollands (post below) ” .And in many cases the Solicitor used was one recommended by the Developer . Where they probably both worked in collusion not to highlight these offensive Ground Rent terms leaving the purchasers unaware of what they were letting themselves in for”.
It must be acknowledged that leasehold buyers were trusting and naive, and (purposely) not informed of the consequences of their purchase of a tenancy.
But then they were being sold “home ownership” – in some cases, the nonsense of “virtual freehold” – from plc housebuilders. And taxpayers were assisting them. The rationale for doing so is to increase home ownership.
So what could go wrong? These consumers were doing what society wanted: obtaining a material stake in it.
In fact, they were ensnared in a hard-sell process that was difficult to break out of in order to keep to arbitrary sales deadlines and to conform to the extra layer bureaucracy in the form of the Help To Buy scheme. Only a fraction used solicitors of their choice in their purchase.
Most used conveyancing solicitors “recommended” by developers – in one case, “approved” by a developer – who repeatedly revealed themselves to be the developers’ stooges.
Leasehold is complicated and the monetising opportunities by freeholders are virtually limitless – and whose asset, the freehold, may amount to as little as three per cent of the value of a block of flats (and sometimes even less, in older properties).
Nonetheless, they are the “landlord” in law, with the nuclear option of forfeiture routinely threatened, and virtually unassailable in numerous money disputes.
Finally, your points ignore the existing legal gymnastics adopted to make leasehold fair.
Enfranchisement, for example, introduced in 1993.
In what other area of law can a group of private individuals compulsorily purchase the property, the freehold, of someone else? This, in itself, should alert the uninvolved that things are fundamentally flawed in this system.
This highly complicated property tenure favours informed property sector insiders, to the detriment of consumers, especially the young, the old and the non-professional (although plenty of well-healed London leaseholders are equally ensnared in it).
The Government’s triple lock doesn’t increase pensions in line with RPI it uses CPI which is a lower figure.
The disadvantage in the TW solution is that the RPI increases continue for the whole duration of the lease period..
And in many cases the Solicitor used was one recommended by the Developer . Where they probably both worked in collusion not to highlight these offensive Ground Rent terms leaving the purchasers unaware of what they were letting themselves in for.
UNCONSCIONABLE conduct carried out by one sector of society who have superior information flow (developers, freeholders’ funds, financiers, SOLICITORS) at the expense of an unsuspecting and more naive part of society (consumer homebuyers).”. Some quote Shakespeare, I like Crispin Blunt MP.
TW should link to CPI and not RPI. They link to RPI as it’s a much higher figure and pensions to do not keep up with RPI.
John and Stephen.
If only you were our managing agent rather than L&Q. Your maths is shocking and your GR rates not based on reality.
Currently paying £350 pa GR doubling every 15 years which is equivalent to 7% pa.
By Year 60 – £42,000 will have been paid to L&Q
By Year 120-£1,335,750 paid out
By the lease end at 250 years it is so many million that my calculator is not big enough to calculate.
As for your certainty that RPI will be forever at 3% again shows your dishonesty/ignorance. It is people like you who give this sort of advice that creates future problems. Remember interest rates upto 15% from the 1970s to 1990.
The Government has allowed Help to Buyers to be ripped off by Housing Associations with charitable status. There really is no end to leasehold malpractice.
HAs should be summoned to the Communities committee along with that nice man at Persimmon paid £100m bonus. He gave most of it to charity.
Oh and most leaseholders used the developer’s own solicitors.
Well General Mcarthur has kindly told me that I need a brain transplant but I calculate the figures for your case as follows.
Years 1-15 15×350= £5250 paid
Years 15-30 15×700=£10500 paid
Years 30-45 15×1400=£21000 paid
Years 45-60 15×2800=£42000paid
Total paid over 60 years=£78750.
If you read my post I calculated a 60 year payment at £22.5k per £100 present ground rent so for your case £22.5k×3.5= £78750. The figure for RPI indexation at 3.0% pa would be £8kx3.5=£28000.
I appreciate that inflation as measured by RPI may well vary from 3.0% but this was the figure used by Ms. Darbyshire in the original article.
I have misled you and our readers by not pointing out that the effects of inflation will impact on the ‘doubling ‘ payments in just the same way as they do on the RPI payments.
I think it is , and know it should be, against the soliciting code to act for both sides in a transaction. E&OE.
John
Yes Over 60 years total paid = £78,750
Over 75 years = £162,750
Over 120 years = £1,335,750
Remember leaseholders get no benefit for paying vast sums of GR, in my case at 7% pa . This is free income for freeholders many of them faceless offshore companies.
Ms Darbyshire using 3% RPI was very conservative. RPI measures goods and services. Ground Rent is neither. Just a charge for no service.The situation will be far worse.
With the respect your maths is wrong. A rent that doubles every 15 years is growing at a rate of 4.73% (i.e. it is the 15th root of 2 and then from that result you deduct 1 and multiply by 100) – or more simply if you divide 15 into 73 – you get a fairly accurate result. if a rent doubles every 10 years then it is approx 7.3% i.e. 73/10 and if it doubles every 20 yrs its is fairly accurate to say that it is 73/20 = 3.65%)
The root of the problem in this discussion is that the rent projected into the future is thought of in terms of todays incomes. If inflation runs at 3% per annum incomes cannot remain static over a period of decades without riots on the streets. Income have over the years risen greater than inflation. As we know the government is committed to increasing pensions greater than inflation and public sector workers expect incomes to keep pace with inflation at the very least
For the record I have no business association with the Tzchenguiz brothers
So the Tzchenguiz brothers can be ruled out. Thank you Stephen.
Stephen
This thread really is hilarious and sums all that is rotten about leasehold.
How the f…. are purchasers meant to understand any of your calculations. We are talking millions of pounds over 250 years.
Every leaseholder in the country will be bankrupt at some time in the future which is why Government will be forced to abolish GR and disappoint their vested interests.
What is the point of the Communities Select Committee if it does not dare ask developers to attend and be questioned. Passing the buck to the Law Commission is the usual kicking the can down the road routine. Too many difficult questions maybe.
Let’s hope the media do more in depth reporting on the great property fraud benefitting the few paid for by the many.
Joe, in truth select committees are theatre, nothing else. I have no faith whatsoever in the Law Commission – they are a part of the system that has allowed leasehold it’s continuing existence, but when issues are passed to the Law Commission, it means something is happening, the first step in a laborious procedure.
No faith (in the Law Commission)? I recall an interim report from the head of the Commission. I picked out his concern that landowners be considered, and compensated where necessary, in his final recommendations to government.
Stephen and John,
As a leaseholder trying to get myself out of this mess I accept reluctantly that I’m going to need to pay the freeholder to vary the lease to zero ground rent.
The developer who sold the freehold on without my knowledge after or before the property was purchased, without informing me or the other 170 leaseholders is not minded to compensate or offer a dodgy RPI deal.
The problem is I have in a new build complex of 170 flats is that as it stands the landlord is within his rights to refuse a variation at any price.
The only alternative is collective enfranchisement a near impossibility as individual leaseholders have almost no chance under the current rules of getting the necessary numbers to make this happen added to the time and costs involved in navigating a tribunal system loaded where all the costs and rules are rigged against us.
What we are left with then is people like you justifying a system where people and their descendants are forced to continue with a grossly unfair contract against their will with in the absence of agreement to vary at a fair price leaves forefiture of the flat as the only way out of the contract.
I’m sorry but whilst it might be legal it’s grossly unjust. I would remind you that in the 18 century it was legal to enslave people and hang them for more than 200 offences.
As to RPI it actually means retail price index how on earth can ground rent which bestows no benefit whatsoever to leaseholders be tied to an inflation index which is linked to goods and services.
As to public pensions and public sector salaries they are actually tied to CPI would that they were tied to RPI which the government is phasing out as this would pay more.
Sometimes the law needs to change to facilate justice Android this is one such occasion.
What a hoot this comments ‘thread’ is.
Leasehold lets developers maximise open market profit at sale. The built in reversion ensures that, as the lease term falls, the freehold value increases. Throughout, the freeholder can profit from consents. At no time does the freeholder incur any costs.
As the lease goes “short” the freeholder gets another windfall from a loaded formula that even the average MP doesn’t understand.
After all this as if on cue enter Stephen and John to argue seemingly only about the right to inflation proof ground rent on top.
Only in the twilight world of leasehold can you SELL something for a healthy net profit, enjoy contractual ongoing windfall, and RENT the same thing for inflation proofed yeild on top.
Nobody has yet proved to me anyway that leases are sold at a discount to factor in ground rent.
I feel sorry for freeholders. While ordinary citizens must accept less than inflation yield on their own hard earned savings, or risk their shirt on the stock market, freeholders are forced into bored idleness watching their profits ratchet up. A tough life to be sure.
Nobody meanwhile understands inflation. Even if they do, RPI is not going to measure it fairly for them. Doubling over long intervals has the merit of advance calculation. It is the starting level and the time periods that determine. RPI indexing over short increments as the article exposes is just a different unreasonable method.
There is NO justification at all for residential ground rents.
Sell or rent. Either or.
Paddy, A local builder did a job for a neighbour of mine. The neighbour then went on holiday and came back to find a hole in her living room ceiling and her bath sitting proudly as a centre piece in the middle of the living room floor.
Someone better informed (on building techniques) than I – and the individual who related this story to me – described the builders work as a complete botch up, he had made the most basic of errors.
Of course the affected neighbour complained and demanded suitable work be done to restore her home to the state it was before “Jerry” undertook his work. It is my understanding she wanted another builder to do the work and for “Jerry” to finance the work, quite naturally.
Jerry’s wife, a woman of some standing in the community, then stepped in with comments on Facebook (or Twitter, wherever), “I told “Jerry” not to take the work on, the woman is a bad payer” was her initial post. A heated conversation then ensued on this issue of whether “Jerry” should have taken on the work in view of the woman being “a bad payer”.
Everything had shifted from a botched job by “Jerry” to this woman being a bad payer. I am reliably informed that the woman who has been labelled “a bad payer” is a meek and mild individual horrified by the idea of debt, and one who is scrupulous about paying her way.
Why this story here on LKP? Because opponents of leasehold reform/abolition try to divert the argument, just as “Jerry’s” wife has done, and there is no finer example of this than Stephen and ground rents, and his mathematics on escalating ground rents, and his attempts to demonstrate how equitable they are when inflation is taken into account.
“Fifteenth root of 2”, RPI, CPI, MFI, FBI, and whose calculations are right – and whose are wrong, I couldn’t give a monkeys. Nor could Crispin Blunt, “I ADVOCATE THAT THERE SHOULD NOT BE ANY GROUND RENT AS PROPERTY TITLE SHOULD BE EITHER FREEHOLD OR COMMONHOLD”.
Re Ground Rent
In my experience, a token Ground Rent has importance in that it evidences the contractual relationship – one that is sometimes denied. In my own court case, the defendant original lessor admitted the leases, but denied that I was a party to the contract, saying that I was not the original lessee named in the lease.
I countered this the long way round, by quoting all the law on the subject (to emphasise just how poor the defence arguments were). I could have cut that argument short, by simply showing that the Defendant had been billing me for £5 per annum Ground Rent for a number of years.
Sussex, If all property sales were on, either, a freehold or a commonhold basis, there would be no third party to have issues with. And therefore no need for you to possess evidence of a legal relationship with a third party.
With freehold and commonhold, the only people to have issues with are neighbours, and that is, sadly, the norm..
Very sorry to hear of the problems people have had with ground rents on new build houses. I have had a leasehold flat for 3 years, some issues with poor service and rising service charge. Leasehold law is a crock of ****, England and Wales need to move to commonhold as exists in much of the rest of the world. My MP, John Grogan, agrees with me. The law is under review, hopefully the mess with leasehold new build houses will be sorted soon, flats after that. Not being political here but I don’t think the Conservatives will commit to commonhold, but patch up freehold / leasehold. A Labour / SNP coalition would probably be bolder, and force freeholders to give up their interest in a property for a fair price and move to commonhold as exists in Scotland. I would not have bought a flat if I knew 3 years ago about all the issues surrounding leasehold. I think beneficial change is coming in the next 3 years, just hope it is more than another sticking plaster.
Nikki
The point on having the ground rent linked to the RPI is to keep the purchasing power constant over time
Doubling is merely a wild guess as to what future inflation may be and if inflation is very low or negative (which is quite likely in the medium term) then doubling could make the ground rent onerous
If you are not familiar with the mathematical concept of discounting rather than mocking me it would help you articulate your argument if you researched it so your arguments can carry greater weight
Impeded in the factors that make up a discount rate is the markets long term view of inflation, if you understood that point you would not paint a picture of a ground rent of some several millions being paid out of current levels of income
Stephen
Your argument about discounting is a cracked record that sounds more shrill the more you repeat it. It sounds like buyers are getting a bargain because developers are lowering the price out of the kindness of their hearts.
How many times do we have to tell you there is no discounting. Purchasers pay the maximum price developers can get and high ground rents are legal robbery. Simples.
Develops behave like all other property sellers in that seek to get the maximum price they can for their property and is the inevitable consequence of the free market.
Ground rents provided they are disclosed and the increases clearly explained and going forward valued using a prescribed discount rate I can see nothing wrong . The ground rent is indeed for “no service” and buyers must reflect this in their offers.
Some home sellers “tosh out” the flat and achieve far more for the flat over what they spent…..it all the same thing
Nicki, You really must pay attention, Stephen wrote “Impeded in the factors that make up a discount rate”. Is there some impediment of intellect that makes you unable to understand that simple statement?
If there is (some impediment of intellect), join the club.
Stephen,
There is no justification for the new doubling ground rents, apart from developers and ground rent investors screwing ordinary people over to make as much money as possible and trapping them in unfair contracts supported by an obsecenly rigged and arcane leasehold legal system.
You may try and justify doubling ground rents, discounting and all the associated hogwash. But at the end of the day they have only worked for developers and spiv investors.
If your ground rents were such a bargain people would be able to get mortgages but they can’t and why? Because the banking system has rightly deemed them to be a crock of sh*t!!!
I should have said banking system and neoliberal Tory government!!!
Much as I hate it, I have to here defend Stephen in one important area of terminology and effect relevant to Joanne’s points.
When folks talk about discounting they either mean a nice slice off the asking price, or they can be referring to the way future values are discounted to arrive at a present value to ‘deduct’ for inflation.
Whereas there is no evidence presented far as i can see that leases are ever sold at a discount to allow for ground rent (Stephen often claims this, no?) this is not the same discounting done when calculating the present value of ground rent. Makes a well huge difference.
It isn’t right to just add up all the pounds paid out over the term. yes, that money is actually paid (assuming the inflation occurs). But that distant future quid is far less valuable at today’s prices. So we have to discount to arrive at the present value of all those quids to correctly compare one ground rent scheme to another.
If £100 was doubled every ten years for fifty years and then fixed for 200 years, the total paid would be £671K. (Unless my spreadsheet is broken and it might be).
Assuming 5% yield, the present purchase value (or capitalisation) as an investment of all that ground rent payable in future would be £11,649. Less if the yield % is assumed to be higher.
On the other hand, if £100 is incremented every ten years for 250 years indexed by RPI, the first question is to guess the average RPI over the term.
If the average RPI was 7%, this would be almost the equivalent of doubling every ten years throughout the term. The total paid out would be nearly £23 million. Assuming 5% yield, the present purchase value of that £23 million paid out would be £412,174.
If average RPI was 3%, the total paid out would be nearly £5 million. But the present value would be £4,378.
So, it is true that 3% RPI incremented every ten years would be far higher in actual payments than doubling for fifty years, but the present value would be far less.
The slippery bit is how the deferment calculation needed affects the present value of the future increments. In reality, all those future increments are steadily discounted to arrive at the total present value.
Inflation is a slippery customer, and that’s before anyone shows that RPI is the fair way to calculate it. Each local housing market operates to a different inflation rate even by property type. RPI offers little here far as I can see. And who pays for the review?
It is all smoke and mirrors to me. But it is true and Stephen is correct to point it out, that (modest) RPI incremented GR every ten years is far less costly at today’s value than doubling ten yearly for five increments.
The problem is, nobody knows in advance that inflation will not run away back up to 1970s levels. I wouldn’t want a lease that forced me to accept staged inflation reviews based on some dense clause that even my solicitor does not understand, as appears to be the case here.
There is no justification I can see for leasehold ground rents. That ship has already sailed based on government announcements for new residential leases. Not that Stephen will accept this it seems?
What the guv need do about existing contracts is not, as Stephen seems to argue, a need to overthrow capitalism as we know it.
Whatever happens there is no justification to inflation-proof ground rents. If they must remain for existing leases, they merely need to be at peppercorn to keep the contractual relationship in place. How the price is designed to buy out the ground rents is a matter of law, just as was the existing loaded and unfair formula.
All in the interests of factual fairness.
Whoops, that example of 7% RPI incremented every ten years for 250 years does not add up only to £23 million paid out. I can’t bring myself to write down what my spreadsheet actually reports it to total. The PV capitalisation is still £412K.
Just a thought? If the argument for selling properties on a leasehold basis is to reduce the initial purchase price and that “saving” is accounted for by way of a ground rent charge, could it not be said that that in some cases stamp duty that should be payable is being evaded?
SDLT is payable on ground rent and if you review the calculation on HMRC website you will see it asks for just the first 5 years rent
https://www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/holding
IIt is regrettable the rent in all years is not required on the HMRC website as this would show the problem of the 10 year doublers as the purchaser would be advised of the SDLT liability prior to completion
The fact that an opportunity was lost to gather in more SDLT is not the failing of the developer but more the government for failing to set the net properly to catch the tax
In view of the ongoing(?) debate on calculations of forward ground rents, I thought I would put an end to this unseemly distraction. I have been in communication with the best living mathematicians in the world – . Terrence Tao, Andrew Wiles and Grigori Perelman.
As one they responded, “The matter of leasehold is not a mathematical problem, it is a moral problem, WE ADVOCATE THAT THERE SHOULD NOT BE ANY GROUND RENT AS PROPERTY TITLE SHOULD BE EITHER FREEHOLD OR COMMONHOLD” They added, “Being mathematicians we thought it necessary to consult with moral philosophers before opining. This we did, with the finest in the world, together we drafted the above statement in LARGE CASE”.
Correct, nobody has yet been able to give a sound reason for Ground Rent existing.
Everyone should have the right to a home, whether it be a flat or house without suffering the torment of excessive unaffordable ground rents and other ridiculous charges.
If there is anyone who can justify it, then maybe they could also show that ground rent should be added to other essential items like a loaf of bread or a pint of milk.
Ground rent for the land on which the cows graze and the wheat is grown.
It is as ridiculous as that.
Then the alarm clock went off and it was the start of a new day
And as far as leasehold is concerned wake up in the 11th Century.
Leasehold has not changed much since then.
“Land equated to power in the Middle Ages and powerful families wanted to retain ownership of their land while maximising income from it. The concept of leasing was established to allow villeins or surfs to work a plot of land for a fixed period of time, on the basis they would repay in kind by providing food and services to those further up the social order.”
Actually it is probably worse now, young families conned into purchasing leasehold or promised they can buy the freehold..
Only to find it is sold on to offshore investors. They become financially ruined, Far worse than forfeiting a few cabbages or potatoes.
I think we’ve probably won the moral argument on ground rents. Even free market Tories and New Labour types agree it’s morally bankrupt.
The arguments are about what replaces it, the extent of change and what to do with existing ground rents.
In respect of existing ground rents freeholders and their supporters want to preserve as much value as possible as witnessed by the likes of Stephen pushing the law of contract and justifying existing formula.
Leaseholders want to minimise or eliminate the value of existing ground rents due to dodgy sales practices or unfair contract terms.
Given its in the hands of lawyers many of whom have made fortunes enabling this crap I suspect we will probably end up with something in the middle albeit more skewed in favour of freeholders than we would like.
Based on the history of leasehold reform and the sheer power of vested interests I don’t have the confidence I should despite the huge efforts of those lobbying for change.
Sorry to be political but leasehold in my eyes is an example of England being the last colony of the British empire, I feel very much a subject rather than a citizen.
It seems to me that most of the criticism is misplaced.
Housing developers are there to make a profit. Selling leasehold houses with ground rents gives them a useful additional profit on top of selling the house. Selling them with doubling ground rents gives them even more profit.
Blaming them is like blaming a fox for eating your chickens – it’s just their nature.
In any event, it’s a free market. Nobody is forced to buy a leasehold house or to accept one with a doubling ground rent. On the face of it, people who have done so are stupid for not having checked what they were buying, and deserve no sympathy.
But the reality is that buying a leasehold house is not like buying a can of beans. It’s a complex legal transaction, and even an intelligent and well-educated person needs good legal advice.
And that’s where it went wrong. The legal advice they received was crap.
And why was it crap? Because most of the solicitors had been bribed by the developers to mislead the buyers.
A conveyancing firm might make a couple of hundred quid profit out of acting for the buyers, but if they get 10 or 100 buyers all buying basically the same house the profits escalate dramatically for very little extra work.
So many firms will prostitute themselves to developers, saying “You send us plenty of buyers for your houses and we won’t rock the boat by telling them about these doubling ground rents.”
This practice has been going on for decades, and it’s about as blatant a conflict of interest as can be imagined. It should long since have been made a criminal offence as well as being a specific disciplinary offence that could result in the solicitor being struck off.
But the SRA, the Law Society and all the other regulators have just ignored it, and allowed the practice to go on with little or any risk of penalties. They have disgracefully neglected their role of protecting the public from rogue solicitors.
The firms that acted for the buyers in these cases should be named and shamed, but they’ve so far managed to avoid any significant adverse publicity. If it weren’t for their corrupt and/or negligent conduct none of this scandal would ever have happened.
Bold words and forthright opinions from a solicitor …
… except, er … although you call for ‘naming and shaming’ of solicitors ‘bribed’ by developers you are not doing any, and neither will we, for obvious reasons.
You are wrong to say housing is a free market: it is a hugely subsidised one. In many cases here the Help To Buy scheme was involved: public money to create homeowners, who turned out to be ripped off tenants.
So if the leasehold buyers were mugs, so were the rest of us.
Many of these buyers were doing what wider society wanted: obtaining a material stake in it.
Michael,
So blame the stupid victims eh?
Blame the lawyers eh?
But the developers get a free pass for selling crap leases and bribing said lawyers because it’s in their nature. What a ringing endorsement that is for what is one of our major industries.
It’s not just leasehold though is it, developers have been selling whole heaps of crap for decades rabbit hutches the smallest in Europe with poor build quality and death trap cladding.
Some new developments have been so poor they’ve had to be pulled down a year or two after completion.
I suppose the poor saps that bought that crap are also to blame.
You talk about stupid buyers but forget the context of an acute housing shortage, rising prices, a broken and totally defective regulatory and leasehold system, predetory developers and housing professionals and next to no new social housing.
Given all that it’s easy to see why buyers made “bad decisions”. The odds haven’t exactly been stacked in their favour have they?
I’m afraid aided by politicians who have been the recipients of political “donations” developers have been able to get away with murder for far too long the system has allowed them to sell crap and con consumers without any consequences.
Maybe now things will start to change a little.
I agree that a developer seeking to maximise his profits can package it any way he likes PROVIDED that the terms are made clear . So the ground rent can be whatever amount and whatever term he likes but it’s NPV is clearly shown in the lease so the remifications can be considered by the purchaser prior to entering into the lease
If the oremium paid and the NPV of the rent far exceed the value of the property then it is the failure of the professionals who advise on the purchase . .Not the lessee unless of course the terms were pointed out and the lessee ignored the advice
If a contract is clear on the matter of the term and the rent and it’s review then I do not see why those terms should be altered or revoked . The purchaser has some weeks to look over the lease/contract and be advised professionally so why should it be unwound . What about other contracts for goods and services would they be attacked under the same principals
Not if he is subsidised by taxpayers, he can’t.
You free market capitalists would be more plausible if those who you defend did not have their lips clenched firmly on the teat of public money.
It is not just those who bought these crap products who were conned, it is the rest of us who subsidised the purchase as well.
Other goods and services such as vehicles, food and drink, air travel, holidays etc tend to be better and more rigorously regulated with better protection for consumers for far lower value products.
Are you seriously saying that individual consumers even with legal advice are any match for multi billion pound developers hell bent on profit before anything else?
As I said before consumers have had the cards stacked against them from the start and all those with power have acted shamelessly.
The developers have pursued profit at any cost to the point of literally building and selling worthless products for hundreds of thousands.
Successive governments have failed to legislate even when it was clear that the housing market, leasehold, property management and conveyancing in the UK were not fit for purpose.
Most property professionals and politicians allowed themselves to be compromised by the developers and construction industries as they had the money again to the detriment of the consumer.
As for redress when things go wrong consumers have the grotesquely stacked in favour of landlords property tribunal and wholly inadequate building guarantees that aren’t worth the paper they’re written on.
If the consumer takes legal action against their conveyancing lawyers you are opening up another opportunity for consumers to be fleeced by no win no fee merchants …who knows how effective they will be.
Simply working out the cost of a leasehold variation or freehold purchase is fraught with technical complexity especially since in most cases as even staunch defenders of the free market acknowledge, the true cost of purchasing your way out of a doubling ground rent was never made clear.
It is without doubt a huge scandal and says something very disturbing about the state of this country.
Even with all this we have people defending the right of these huge corporations to sell crap and knowingly swindle consumers making the most important purchases of their lives.