By Michael Epstein
Remember the days of the funfair? It wasn’t complete without candyfloss. That huge mound on a stick that completely disappeared into nothingness when we tried to eat it.
Of course, that is because candyfloss is basically sugar, corn syrup , flavouring and colouring. All this is spun at a very high speed which adds air and appears to bulk it out. Which is why so shortly after it is made it begins to degrade to its constituent parts.
And so it is with property. Naturally each property has its value, which can go up or down according to circumstances.
But leasehold has allowed an artificially created value on property that goes well beyond the notional value of the property.
We can all understand the concept of buying a home on a mortgage.
Suppose we buy a home for £300,000 with a mortgage of £270,000 pounds? That is a loan to value ratio of 90%.
Now, let us assume that instead of a normal home buyer you are a property speculator.
Imagine as a property speculator you have created a leasehold on the freehold property that you have purchased.
You have immediately increased the value of the asset, because you can add the amount of ground rent income you will receive to the value of the property.
So now you have borrowed £270,000 pounds against a valuation of £377,500 pounds(a 62% loan to valuation) – and that is assuming a period of 50 years, whereas the Tchenguiz business model was based over an astonishing 150-year term! Even today, the parts of his portfolio that have been sold off have loans secured on them over an 85-year period.
Of course, there are many other income streams generated by speculators in freeholds, such as management fees, permission fees, insurance commissions and administrative fees etc.
So all in all, it is a very profitable way to make money (especially while interest rates are so low).
But what if it happened that the business model adopted by the freeholders were ended?
What if they could not double ground rents? They could not rack up enormous, totally unwarranted commissions for building insurance? They could not charge outrageous administration charges? They were made to set up development “Right To Manage” or Residents Management Companies, so that leaseholders were no longer forced to use the freeholder’s connected management company? What is they were forced to sell freeholds to the leaseholder at around 10 times the ground rent, as has happened in Scotland and Northern Ireland?
What then?
The froth that is the “extra speculative value” put on properties disappears much like the candyfloss.
The warning signs for developers and speculators are set to “Danger”.
Naturally, they are going to fight tooth and nail to preserve their cosy schemes for as long as possible, but ultimately they will fail.
Selling leasehold houses which should have been freehold, was the final straw that broke the camel’s back.
As is typical in so many situations, they got greedy and they got arrogant. They thought they were untouchable.
They are NOT!
Related posts:
Leasehold first-time buyers trapped in leasehold homes with £800 ground rents, says BBC
Average service charges are £1,863, but rise to £2,777 for new builds
The Times: ‘Exit fees and poor resale values: the uncomfortable truth about retirement homes’
Telegraph reports that leasehold newbuild flats are on the rise
Campaign against Residential Leasehold Exploitation reveals abysmal retirement housing re-sale values
Urban Owners finds 41% of leaseholders have not had lease terms explained by solicitors
exellent post M E stay with it you are doing a great job.
Been studying the lease extension caper.
Fond an interesting quote or two in Hansard before the LRHUDA 1993 was passed:
First lord Strathclyde:
“…a lease is a wasting asset. A new long lease is equivalent in price to a freehold but its value declines inexorably as its term expires. This makes a lease increasingly difficult to mortgage, since building societies are usually only prepared to lend on an unexpired lease of at least twice the mortgage term. This problem is now becoming acute because so many long leases of flats date from the new owner occupiers of the 1950s. As they have become unmortgageable, so the urgency for this reform has increased.”
“…because a leaseholder remains legally a tenant, control remains with the freeholder. This is a particular problem with flats where the communal nature of repair, maintenance and insurance gives control of the block to the freeholder. Yet all the costs fall to the leaseholders. Research by the Consumers’ Association found that two-thirds of leaseholders reported problems with their landlords, nearly half of which they considered to be serious. Typical problems identified included overcharging for services, misuse of funds, suspected non-payment of insurance and harassment.”
“This Bill addresses these problems. It is one more stage in the Government’s commitment to encourage owner occupation and to enable an estimated 750,000 long leaseholders to take full responsibility for their own property.” Hansard, Debate 23 February 1993 vol 54
That went well, innit.
Second quote, same Noble lord:
“I know that there is concern that landlords will not receive proper compensation for the loss of their asset. I am happy to reassure your Lordships that there is no element of confiscation in our proposals. Landlords will receive the full market value of their asset plus reasonable costs.” Hansard, Debate 23 February 1993 vol 54
Phew.
Final quote:
“Following what has been said earlier in this debate, may I make one reference to the position of long leaseholders under contract. First, when they entered into those leases they knew the terms that were on offer. They knew the period of the lease, the amount that was going to have to be paid, and they knew all the provisions. There is no doubt they took wise advice, and on wise advice they probably set up sinking funds. There is no sudden hardship on those terms for breaching that contract purely on the ground that they have a wasting asset. I wonder whether freeholders should be compelled to bale them out, and to give them, as well, a bonus.” Lord Boardman. Hansard, Debate 23 February 1993 vol 54
Bale us out?
I hope similar peers of the realm are not around when any new ‘reforms’ hit the Lords.
We need new legislation to allow leaseholders to buy out the freeholder interest. And by all means, is is only fair that freeholders should be compensated and it is also fair that leaseholders should be compensated for all the ‘service charges’ that were misused. Surely, a thorough tax investigation is in everyone’s interest, no? We could practically resuscitate the NHS with what we may find…
Fond? Here’s the ‘u’.
WOW this is brilliantly written. You hit the nail on the head. I love your posts. Your comparisons make it so much easier to understand.
Enough is enough. Your right their greed has pushed it too far.
The scales have tipped and the greedy rich freeholders need to be held accountable for what they have created.
Leaseholders will not accept this any longer.
It disgusts me to read the astronomical bonuses these developers are receiving off the back off leaseholders misery and tax payers help to buy scheme.
The reason why flats are sold under leasehold title in E&W is because the mortgage lenders require the property to be under a maintenance contract. The Property Developers advertise new properties for sale, the retail buyer thinks they are buying a property, but what they have bought is a 99 years or 125 years lease on onerous terms including paying annual ground rent, annual service charge , insuring a building which does not belong to the leaseholder . If you have ever bought a new property, the developer’s solicitor will send your conveyancing solicitor a draft lease and tell you NO amendments accepted because all the leases in the building have to be the same.. The buyer has no say in what terms are put into the lease or any powers to negotiate with a supplier.
If the buyer are given a 999 years lease at peppercorn ground rent , the terms are equivalent to freehold and the buyers will collectively control the building .
When the developer decides to demand £500 p.a ground rent for first 25 years and doubling up after every 25 years , it creates investment value for the freeholder. and adds 1-2 % extra revenue for the developer. The leaseholder buyer enters into a lease contract which which initially costs the same as buying a freehold property, but also paying to sustain a freeholder for 100+ years until lease expires and property is returned to the freeholder . What happens is our laws protects the freeholder company and destroys the family savings base for 5 generations. of leaseholders..
Comparing the tax situation, the leaseholders must pay 20% and 40% tax on their earnings but the freehold company can claim loan interest offset against ground rent income and many companies do not pay tax. at 20% for years. .
So we should ask LKP to make all 650 MPs in Parliament be fully aware that the hmrc tax situation is tipped in favour the “freehold companies” and their unscrupulous directors at the expenses of the leaseholders. who have voted the MPs into Office and not doing their job.
I am puzzled as to how the property increases from £300k to £377.5k by the intoroduction of a ground rent
If I was offered the choose of two houses identical in all respects one freehold and.the other leasehold with a ground rent of £250 per annum rising every 10 yrs by the RPI I would expect to pay around £8k less for the leasehold property as I will be paying £250 per annum going forward
The rent is really part of the consideration and should in my view be capitalised at a prescribed rate and shown next to the consideration payable .so a purchaser can make an informed choice
Ground rent is indeed for no service – that is because it is part of the overall consideration payable . It’s failure to disclose it clearly as part of the consideration is of course the root of the problem
Had the 10 year doubles been discounted using a prescribed discount rate and shown next to the premium paid that problem would never have arisen
The consumer credit act requires detailed disclosure and the government have failed to extend that type of legislation over to leasehold terms
Stephen it doesn’t!
The property price stays at 300,000 pounds, but the ground rent factor monestises it such that the asset valuation that supports the loan increases by 77,500 pounds.
That difference can be used to bring the interest rate down as it is treated as a 62% loan to value mortgage or 360,000 pounds can be borrowed with 60,000 pounds being used towards the purchase of another property.
Whilst lenders are keen to lend,, speculators keen to purchase it is a continual upward spiral of profit (Until the bubble bursts and suddenly it is only the bricks and mortar that has real value)
And at that point, all those fancy money masking schemes come crashing to earth.
Such “can’t lose” schemes always crash and burn! Always have and always will!
But how did you get that exact number – that is what is puzzling
Stephen,Remember this is but an example used to demonstrate a point. In this case I have used a 250 pounds doubling ground rent charge.
Methinks I know thee Stephen and respect your knowledge. Helped me loads.
As to leases selling at a dicount…
“A new long lease is equivalent in price to a freehold but its value declines inexorably as its term expires.” Lord Strathclyde, Hansard, Debate 23 February 1993 vol 543 cc85-176 85.
I think we all know the truth behind developers’ claims that leases are sold discounted vis a vis freehold. Houses are easier to compare than flats, as there is no real world comparable with flats. Leasehold houses do not sell at any discernible discount.
As for the doubling scandal perhaps being avoided by publishing the cost of the ground rent at time of purchase, the sums would certainly make for interesting transparency:
Take a 99 year lease selling for £100K and 5% yield…
Start rate £100 doubling every ten years
Present value: £12,566
Total paid: £971,800
Start rate £200 doubling every ten years
Present value: £25,133
Total paid: £1,943,600
Start rate £300 doubling every ten years
Present value: £37,699
Total paid: £2,915,400
I would want both figures revealed. Would pause for thought.
Despite the outrageous ground rents freeholders started to apply with informal lease extensions, my bet is many lawmakers in the peerage camp will still stress as to:
“…when they entered into those leases they knew the terms that were on offer.”
and fret…
“whether freeholders should be compelled to bale {leaseholders} out, and to give them, as well, a bonus.” op cit.
This is simply untrue. The freeholder may appoint his own managing agent, who may appoint the window cleaners, take commissions on electricity, insurance and all the rest. He may continue to charge hefty fees for permissions for everything from keeping a pet to making alterations. He still has the threat of forfeiture in his back pocket. Leaseholders never control a building unless they own the freehold between some or all of them.
If there is no ground rent to collect for 999 years , the leaseholders will make a compulsory purchase of the freehold title for a nominal £100..
I have written to Sajid Javid MP and attached my ‘Papers’ politely asking for them to be included in the Leasehold consultation in support of the mandate to Regulate Residential Managing Agents and to remove the concept of “Forfeiture ” from the statute book. I explain in the ‘Papers’ why these steps are necessary to put an end to the tyranny of the present inequities in so far as they effect Residential Leaseholders . I cc’d APPG members and the Guardian Newspaper. I support the abolition of Leasehold and favour commonhold, however, I believe that goal will take slightly longer to achieve!! Abolition of Forfeiture and strict regulation of Managing Agents can be effected NOW. I hope LKP publish one or both of my ‘Papers’. They will show that it will be rather uncomfortable for Mr Javid to disagree with my points!
The current level for starting proceedings for forfeiture is arrears over £350 in ground rent and after 3 years in arrears which is not sensible.. It shows the Civil Servants in Housing Department don’t understand the sale situation of leasehold property.
New 2 bed flats in London area are now selling at around £500,000 and starting ground rent is £550 per year.. How can you be in risk of forfeiture when you have just paid £500,000?
The correct level for setting start of forfeiture proceedings should be when the arrears exceed £500, 000 + £350 = £5,00,350 .
There is no reason why a financial breach by a tenant cannot be dealt with through the remedies of normal debt collection in the courts or via bailiffs. In addition and In very narrow circumstances the concept of a forced sale by a tenant imposed by a judge is a principle I would agree with. This will remove the windfall profit element which can provide stimulus for certain Landlords to exert undue pressure upon their tenants to vacate. The threat of Forfeiture,dating back to Feudal times , has become a ‘sledgehammer to crack a nut’ and is wholly inappropriate in today’s modern world.
There has to be more power to collect than with a normal debt
The lease can be assigned and no references can be requested so whilst forfeiture is a step to far the concept of a forced sale where the debt takes priority over all others has to there
Otherwise resident associations who own the freehold would be exposed to losses which under the terms of the lease cannot be passed through the service charges
.
The Law commission proposed a move towards proportionality in relation to the level of debt for which recovery was sought.Ensuring that monies outstanding are paid or a breach of covenant is remedied in such a way as to remove the profit windfall element .
As I stated In my previous post, there is no reason why a ‘financial breach’ cannot be dealt with through the normal remedies of debt collection.
The threat of forfeiture is a ‘ Nuclear Weapon’ used by unscrupulous Freeholders and managing agents on a regular basis and is widespread however it’s implementation by the courts is minimal
This draconian penalty is used as a mechanism by the aforementioned unscrupulous practioners in the residential property management world to extract irrecoverable and unreasonable sums from vulnerable, Intimidated and threatened Leaseholders.
Now is the time to abolish this shocking threat once and for all.
Clarification- I didn’t cc the Guardian, but emailed them.
Excellent post Michael!
Michael, it is good to see you continuing the struggle. We are now starting to make progress and MP’s will be overcome by the tidal wave of protest. It may have seemed an impossible mountain to climb in the early Solitaire days but we will win this. There is now no going back for the government.
I can only back up others who have commented “excellent article”.
I will soon make an application to the First Tier Tribunal for a hearing to have my premium determined by them for a Statutory Lease extension. It is a 10 year doubling lease starting at £250 p.a. rising to £8,000 p.a. The Freeholder wants £36,000 premium for the statutory extension. This is about 10% of my flat’s value. I have been to the Land Registry website and downloaded the registered title of the purchase of the entire freehold. The entire plot was bought in 2009 by one of the Tcheguiz companies for £134,000. With 32 flats on the site that’s only about £4,200 for each flat so if they paid a fair market price at the time then how come just eight years later, that £36,000 is a fair price?