By Harry Scoffin
The Estates Gazette has recently provided insight into the thinking of the obfuscators of the leasehold sector.
The opinion piece makes delicious reading for leasehold campaigners and others pushing for fairness in this murky corner of the housing market.
* The genie is out of the bottle
The volume and pace of proposed reforms to leasehold property ownership is commendable. From disillusioned members of “generation rent” to those who purchased a leasehold family home only to find it subject to onerous ground rent provisions, the issues span many sections of society. But are we in danger of falling into a moral panic?
Published behind a paywall in late May, three lawyers at the real estates and construction group of international law firm Taylor Wessing give an overview of the latest developments in leasehold reform. They begin positively:
“The volume and pace of proposed reforms to leasehold property ownership is commendable. From disillusioned members of “generation rent” to those who purchased a leasehold family home only to find it subject to onerous ground rent provisions, the issues span many sections of society.”
They then suggest that the new-found interest in long leasehold law by politicians threatens to create “a moral panic”:
“Well-intentioned legislation may provide newsworthy soundbites, but the volume of proposed reform is so fast that it risks becoming incoherent. Even the largest developers need to work hard to follow every proposal.”
Poor old housebuilders…
There is certainly a sense that the level of leaseholder engagement in public consultations has spooked those who make their money from trapping innocent consumer homebuyers under feudal leasehold rules.
Overthrowing England’s leasehold system. One consultation at a time …
September 2017’s Tackling unfair practices in the leasehold market, initiated by Sajid Javid when he was Communities Secretary, let the genie out of the bottle. Government said that it “received a staggering response with over 6,000 replies, demonstrating the strength of interest in this issue.”
Protecting consumers in the letting and managing agent market, which closed in November 2017, achieved 1,793 responses.
At the May 2019 APPG meeting, Law Commissioner Professor Nick Hopkins said:
“We’ve had around 1,100 responses to our enfranchisement consultation, around 300 on right to manage and 1,550 on commonhold. And for that type of project that is an exceptionally high number of responses.”
Speaking before the Institute of Residential Property Management’s 2019 conference in June, Professor Hopkins noted that responses to the commonhold consultation was 500% above average.
November 2018’s Implementing reforms to the leasehold system received over 1,200 replies. In the foreword to the government’s official response, which included the leasehold houses ban, James Brokenshire claimed that “your views have also enabled me to refine our plans to ensure no monetary value is attached to future ground rents”.
Communities Select Committee chair Clive Betts MP has said that the cross-party group’s investigation into the leasehold sector attracted the most number of responses from the general public of any investigation it has conducted in its history.
Earlier in the year, it was revealed that the powers that be successfully threatened the Law Commission with judicial review.
Yes, judicial review.
The issue?
It was claimed that the deadline for the body’s consultation on enfranchisement was too short.
The perfect essay crisis …
The sector presumably needed more time to come up with persuasive arguments to scupper meaningful reform. This is despite having armies of people paid to respond to calls for evidence and artfully lobby government behind closed doors.
According to Sunday Times property journalist Martina Lees:
“It’s too early to sue, but a freedom of information request shows that lawyers acting for at least two major groups of freeholders have already threatened the Law Commission with “judicial review” if it did not delay its enfranchisement consultation deadline.
“There is a risk that the consultation will be subject to judicial review on the grounds of procedural impropriety,” according to a letter by Winkworth Sherwood, which says it acts for institutional freeholders, freehold management companies and developers. “We reserve the right to commence judicial review proceedings,” wrote the Alan Mattey Group, which owns about 25,000 freeholds. Earl Cadogan’s Knightsbridge estate and William Astor’s Long Harbour group – but no leaseholders – were also among those writing to ask for more time. The deadline was indeed extended.”
The home front
Katie Kendrick doesn’t like “just moaning”. So when the right to own her family’s brand new leasehold house was sold from underneath them, the Cheshire nurse started a Facebook campaign to abolish the system that made this legal.
Public pledge ‘demonstrates a fundamental misunderstanding’
Lisa Bevan, Edward Cooper and Katherine Lang at Taylor Wessing give Estates Gazette readers a criticism of the government’s good behaviour pledge we haven’t heard before.
They suggest that developers, freeholders and managing agents, who have not already signed, will not want to put their name to the initiative out of fear it could taint their reputation.
It is yet another argument in favour of a firm legislative approach to addressing unfair leasehold terms.
Government should throw its weight behind the effort by Eddie Hughes MP to lower existing ground rents to 0.1% of the existing property price, up to £250 per annum.
His private member’s bill already boasts the support of some of the key players on the Communities Select Committee.
Backing the cap would be a pragmatic move.
£250 is not the zero financial value that many campaigners desire, but it would probably resist a human rights challenge from the ground rent grazers.
It should be enough to avoid major property devaluation of the existing stock. This is important because without a crackdown on existing ground rents, a two-tier system will open up.
In Estates Gazette, it is claimed that managing agents are already “heavily regulated through their own professional codes of practice and conduct, and so perhaps this pledge demonstrates a fundamental misunderstanding of the complexities of the industry.”
Oh dear.
What would be the point of statutory regulation of managing agents then?
Why has government commissioned Lord Best to head a working group to look into how to formulate a new service charges regime and drive up standards across the sector?
Surely if rogue landlords and managing agents were exceedingly rare, there would be no need for Lord Best’s work?
And why is Nigel Glen, of the Association of Residential Managing Agents, calling for strict regulation? Only on Friday, Mr Glen told the BBC:
“It is crying out for regulation. It is crazy that – I use myself as an example – I set up with a business partner in a back bedroom and, a week later, I was handed half a million pounds of someone else’s money. And all I had to do was form a company.
It should be mandatory to have a license to operate. We think it should be criminal to operate in that market if you do not have that license to operate.”
Leaving buyers in mixed-use developments high and dry
As public outrage intensifies as the true face of leasehold is revealed, the industry’s arguments for keeping it going have become ever more sophisticated.
It is clear that the sector knows which way the wind is blowing. Forget fighting over the piddling leasehold sites.
They are pushing to ensure the Law Commission’s final recommendations on enfranchisement and commonhold conversion are conservative enough to ensure leasehold survives for the big mixed-use city schemes. These, of course, provide the most lucrative opportunities for developers and those who use service charges as a profit centre.
This is confirmed by the Estates Gazette op-ed, which said that there has been pushback on plans to reform the commonhold legislation to make it compatible with mixed-use developments “as this is a step too far until the system of commonhold becomes more established.”
It draws attention to the Communities Select Committee’s misstep over mixed-use. The group’s report suggested that “the most complex, mixed-use developments would continue to require some form of leasehold ownership”.
The industry’s self-serving concern around the complexity of mixed-use actually led to the select committee proposing to exempt such developments from legislation capping ground rents on new-builds at zero financial value (see above). Thankfully, government hasn’t fallen for the trick:
“… mixed-use developments will be subject to the policy. The management and supervision of mixed-use developments is no different to that of single use developments. The costs of management and supervision are generally recoverable under the leases from residential leaseholders through the service charge and from commercial tenants in either the same way or as a part of the rent. The Government does not accept that ground rents are necessary in mixed-use developments.”
If anything, leaseholders in mixed-use schemes are more vulnerable to unscrupulous practices than those in predominately residential buildings.
An investor who gains the freehold of a mixed-use building can use his total control of the service charges from the residential floors to subsidise his commercial operations on the site.
Of course he’s not supposed to do this, but the ease with which service charge accounts can be delayed and fudged, and residential spending conflated with commercial makes it a temptation few will resist.
The Taylor Wessing lawyers suggest that opening up collective enfranchisement to leaseholders on mixed-use sites, “with the landlord taking a lease back on any non-residential units”, represents a “potential loss of management control … [which] will be worrying for landlords of mixed-use estates.”
We know why.
Leaseholders would then have the option to go nuclear and achieve self-determination. They could finally free themselves from this form of financial servitude where they are forever compensating the freeholder for living on their land.
No more third-party landlord aggressively monetising every element of their building.
Here’s hoping the Law Commission will drop support for the arbitrary 25% rule on non-residential premises in its final report.
Project fear narrative
The three lawyers seem to end their comment piece on a rather ominous note. There is a suggestion of mounting job losses if government goes too far on leasehold and commonhold.
“The BFP states that commercial real estate contributes £94bn to the UK economy – that’s more than 5% of GDP. If any reforms unduly stifle development or encourage international investors to look elsewhere, then will they be counterproductive?
In the meantime, developers are in a difficult position – they need a wide-ranging awareness of the proposed reforms, without yet knowing their full extent. They can make representations to the government, but it remains to be seen whether these will be heeded.”
Only time will tell as to whether the voice of the corporate lobbyist has trumped that of the consumer and voter. At least the scare tactics haven’t been working so far.
Related posts:
Lawyers to Communities Select Committee: Stop ‘sticking plaster reforms’. End ‘draconian’ forfeiture. £10 ground rents a ‘mistake’. Make legal costs fair to leaseholders. Commonhold failed because developers make money out of leasehold …
Taylor Wimpey woes reported in Estates Gazette
Rendall and Rittner buys Braemar Estates
48 hours to go: LKP advice on responding to the Law Commission consultation on commonhold
CRL insurers to explain ground rents set to zero
Victoria Derbyshire Show reports the toll of leasehold miseries on mental health
In your article you state
£250 is not the zero financial value that many campaigners desire, but it would probably resist a human rights challenge from the ground rent grazers
This would suggest that ground rents above £250 would be lowered to that figure or 0.1% if lower without compensation being paid to the freeholder.
If a contract is entered into over a period of perhaps two to three months and the lease is clear as to the amount of the financial burden the lessee will have to pay for no service and the lessee is taking legal and valuation advice on the deal, then in principal it should stand. If it is to be reduced, then compensation must be paid.
What are the arguments to support the idea that such a reduction should be given for nothing?. These are the ones I have seen and heard: –
1) The freeholder makes enough money out of the development and therefore this is pure greed –
A developer in our free market economy can be expected to pursue maximum profits and if he feels that buyers don’t really consider the financial burden a ground rent places on a property carefully why should he lose out ?. Homeowners go to all sorts of measures to get the best price for their property and would be indigent if the price they could sell their property for was limited in some way to the price they paid for it sometime in the past.
I suspect today as a result of public awareness solicitors and valuers are now considering more carefully these terms which make the idea that such sums unfair less difficult to argue. As I have said on countless occasions the NPV of the rent should be shown next to the premium paid in the front specified clauses of the Lease using a discount rate set by the Government. In that way the purchaser can reflect quickly and easily what he is committing themselves to. The marketing of a property should show the combined price of the premium and the NPV of the ground rent
2) Freeholders have been scamming lessees and don’t deserve to be treated in a fair way.
More and more lessees live in blocks where the management function is carried out by a resident’s association/RTM so presumably any abuse is less likely (it can still happen though). Obviously there are some who do abuse their position but the failings of these should not impinge on those who have no part in such practices
3) It was written in legalese and didn’t understand what they were entering into
That is not really an excuse, if this did gain traction we would have people trying to get out of sorts of contracts with this card and this would undermine the whole basis of contract law
4) Ground rent were only ever supposed to be token sums
Again this is wrong. Swaths of leasehold houses built during the Victorian economic boon were sold with ground rents of ten shillings to a pound. This was most certainly not a trival sum to a working man in those area 120 years ago. It would have represented around 50% to 100% of the weekly wage
5) Ground rent terms are blighting the ability of leaseholders to sell properties
A near hysteria seems to have broken out. A Ford Focus has a Road Fund Licence of some £300 per annum and its sale prospects are not blighted or the subject of much hand wringing on its sale. The increase in RFL will for certain match or exceed inflation
The perception that a rent above £250 per annum should blight a property sale prospects is again the result of this near hysteria that has recently broken out. Such a sum is not trivial but neither is it daunting in today’s times. The deprecation per annum on a lap top/wide screen television/mobile phone will each in their own right easily exceed that figure in a year and these are assets owned by buyers buying leasehold property costing a tiny fraction of the property purchase
What is important is mature evidenced backed debate on the subject of what an onerous ground rent is. If not then a two system market will exist with the mere mention of a ground rent being payable causing the value and marketability of a property to be blighted, which is of no assistance to existing leaseholders. Neither of course to those lenders who have mortgages over them. I believe the current definition of an onerous rent is too simplistic. I believe an onerous rent is a rent that cannot be easily valued, or the basis of its review is not clearly understood and if linked to an index that index provides for a rise far greater than inflation. It is the uncertainty of the review that makes it onerous not the rent itself. A rent of even £2,000 per annum on a £300,000 property is not onerous if the price the property is offered at is some £50,000 less than normal. And if the purchaser bought it with that sort of discount they can hardly complain of the terms of the rent. Again my proposal about the NPV of the rent would assist the purchaser to make an informed decision. Perhaps the sort of lending criteria lenders should have on ground rents is that “if the rent is above £250 or 0.1% that the value of the property adequately reflects the financial burden of the ground rent”
Further if lessee have the right to lower a rent on paying compensation, I do believe this can be achieved quite easily and for almost all rents (but not all) this would require the inputting of the rent into an online calculator and the result incorporated into a standard deed of variation . If the landlord objects he does so at his own cost. The government to set a prescribed discount rate from time to time
These points have been raised many times inspite of them being debunked.
– my Ford Mondeo has a road tax of £120 not £300
– Road tax pays for roads etc whereas ground rent is, accordig to the website of a freeholder “pure profit”.
– new leasehold properties are not discounted, confirmed by a review of the land registry
– historically ground rents did not increase so dramatically, also very few people had a mortgage ontop (mortgages didn’t exist until relatively recently, home ownership was lower)
– legalese used to obfuscate the NPV
– select committe and law commission stated that changes can be justified with human rights legislation.
Hi, I think you’re reading way too much into my piece. I understand capping existing ground rent, and not abolishing it altogether, can be done legally. Please revisit the Communities Select Committee report. “Retrospective legislation could be compliant with human rights law. We understand that controlling rent would not be confiscation of property but control of its use.” Government has noted this point in its official response document. Compensation is obviously one for the government lawyers! It is not appropriate to be pursuing a billion pound bailout of ground rent grazers. Many of these freehold owners are speculators who bought dodgy investments. Tough luck. The game is up now. Of course, I do not believe in a Mugabe-style land grab. But we’re not talking about enfranchisement here. There needs to be a balanced approach.
Also, your point about more and more lessees gaining some level of control over their buildings through Right to Manage is an untruth. As RTM has been such a miserable failure, the Law Commission was tasked by government last July to make the legislation work. According to the CMA’s market study, there are less than 5,000 RTMs in operation. We know that the existing leasehold stock totals some 6 million properties. Stop misleading people!
Stephen,
In your comment you state…
“If a lease is clear …then it should stand.”
Even should a buyer use an independent solicitor, these may not understand the lease. Should buyers have to instruct specialist barristers to buy leasehold?
Besides, a lease can seem binding only one way. For example, some might argue that buying a lease in a development which blanket prevents subletting is a good thing for those who wish to live only among ‘owner’ occupiers who have invested in and value the gaff. My still original lease gives me this guarantee…
Lessor convenants: “To ensure that the Leases granted by the Lessor of all the other flats contain covenants on the part of the various lessees to observe the like obligations as are contained in the {Lessee Covenants} schedule hereto.”
Does this mean we lessees all have the same (like) obligations? The freeholder has sold variations to sublet for years. I now live among half and half ever changing tenants and remaining resident ‘owners’. I’m advised by a specialist lawyer that the above lessor covenant is no obstacle to him selling variations and the best bit is, each new variation does not allow the other lessees to sublet unless they buy one too.
That’s clear then?
If leases are reasonable contracts, why do so many barristers make a living from leasehold disputes and so many tribunals sit pondering over leasehold and, even after all these years of leasehold, a leaseholder will be unlikely to get a bankable clear opinion on their rights and obligations under a given lease without risking their bank balance at yet another court?
Your views on ‘onerous’ seem to fall on deaf ears with mortgage lenders. Are they infected with hysteria?
Or should all leases for sale come with your opinion printed on a helpful laminate to calm the hysteria?
Freeholders retaining control of Mixed Use Developments?
Worked well for Canary Riveside didn’t it?
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