barcode1966

In a time of universal deceit – telling the truth is a revolutionary act

2016 a leasehold review – The worst year for leaseholders ever?

fullsizeoutput_4ccThis is a review of some of this year’s developments and how it effects leaseholders, unfortunately it’s not happy reading. It is no exaggeration to say that 2016 has been the worse year to be a leaseholder in recent memory, there is very little to be optimistic about.

Each development has made it more difficult to exert the legal rights given to leaseholders by legislation as well as making the costs of doing so rise significantly.

Court fees

This ridiculous idea was first mooted in 2015 to bring in application fees for the First tier Tribunal to be paid by the applicant and it eventually come into force in 2016.

Now, when you apply to the Tribunal, you must pay £100 and a further £200 to attend a hearing. As the vast majority of applications have to be made by leaseholders against unreasonable freeholders this extra financial burden will be borne mostly by leaseholders.

It could have been much worse though.fullsizeoutput_4c7

The second part of the governments fee plan to pay for the court system was to also include a flat fee of £2,000 per application to be paid by the applicant.

Luckily we were given the chance, through ALEP, to be able to talk to members of the DCLG before they made this final.

I was able to explain in detail how disastrous this would be to leaseholders and how much power it would put in the hands of freeholders enabling them to act even more unreasonably in negotiations.

Thankfully, the DCLG agreed to drop this second part to their proposal of increased fees.

The ‘Mundy’ decision

The much anticipated decision in the Mundy case was handed down in May this year and it has caused a seismic shift in the landscape of lease extensions.

The case, which is eye wateringly complicated, was trying to decide a method of calculating how the short lease of a property, of anything below 80 years, effects the value of it.

The behemoth that is the Wellcome Trust spent a fortune in discrediting Parthenia’s valuation model that looked to make the calculating of this loss of property value scientific and less partisan (and ergo fairer to leaseholders). ‘Accepted’ relativity graphs have always been paid for and pushed through the courts by wealthy freeholders to benefit their interests and this case was no different.

Click here to read more details of the case but it should come as no surprise that the uber rich Wellcome trust won the case adding millions to the value of their portfolio.

This has meant that the cost of extending a lease that has fallen below 80 years has risen dramatically. For example, a flat worth £400,000 with 70 years left to run on the lease will now pay around £8,000 more for a lease extension after this decision.

Good news for the already bloated freeholders but it is a wholly unfair result for leaseholders who find themselves caught in the leasehold trap.

At a valuers seminar I attended a couple of months ago, the normally dour grey-suited freeholder’s valuers were positively clicking their heels and dancing with glee at the thought of all these additional unearned fees.

When someone in the audience pointed out to the valuers on stage how unfair this Mundy decision was to leaseholders, an infamous valuer working for a large and difficult freeholder smirked and said “Life isn’t fair.”

As well as making freeholders even richer this case has caused a hardening of the freeholder’s stance across the board. This means leaseholders will have to attend the Tribunal more often to argue the unfair price demanded and pay both the application fee for doing so as well as huge fees of the professionals ‘defending’ them.

CONSOLS replace with the NLF rate
fullsizeoutput_4cdIn another complex development the government cancelled CONSOLS. This was an index used to value, amongst other things, the premium due to a head lessor for the loss of any ground rent due to them during a lease extension.

They replaced this with the wholly unsuitable National Loan Fund (NLF) which is a daily spot rate calculated on the day the Notice is Served. At its introduction the NLF rate was already considerably lower than the CONSOL rate and it continues to fall in line with the current, unprecedented, deflated interest rates.

This has real financial implications for leaseholders who have a head lessor on their property which has an element of the ground rent due to them. In a case we dealt with earlier this year the amount due to the head lessor under the old CONSOLS rate would have been £4,000 this was calculated to be £12,000 at the time of Notice Serving in September 2015. If we had Served Notice today, the amount due would be closer to £20,000!

Rule 13 wasted costs

A recent decision in the ‘Willow Court v Ms Alexandra’ case tried to make clear the qualifying criteria affecting anyone who wished to apply to have their legal fees paid for by the party who had brought an unnecessary and vexatious case against them at Tribunal.

Although the decision made it clear that this is not something this could be applied for automatically if decision went in your favour, it was only to be used only in ‘exceptional circumstances’.

The decision also stated that these application for costs should not “become a major case in its own right”

The truth is however that early evidence points to freeholders applying for these wasted costs every time they win a case to try to claim back their legal fees but more importantly to ‘teach’ leaseholders a lesson for daring to challenge freeholders in court and deter other leaseholders for going down that same route.

Right to manage by block

There was another inexplicable decision which earlier this year “Triplerose Ltd v Ninety Broomfield Road’ which seemed to go against the very spirit of the Right to Manage legislation.

This new ruling means that a right to manage application must now be done on a block by block basis. If you live on a development which contains four small blocks of flats all owned by the same freeholder, you must now make four separate applications for the right to manage. That’s four separate companies, four sets of directors and, obviously, four sets of fees and costs.

Freeholders already have a considerable collection of ruses to frustrate leaseholders who wish to take control the management of their own buildings, this decision has just added another powerful weapon to freeholders unwilling to let go of the cash cow that is management.

Ground rent scandals

This has been going on for a couple of decadesfullsizeoutput_4cb but it has certainly become big news this year with three different ground rent scandals hitting the headlines.

The first was over dodgy informal lease extension deals offered at Blythe Court in Birmingham. The freeholder there is Martin Paine, of whom Sir Peter Bottomley said ‘is a crook who is turning sleaze in leases into an art form’ at the recent debate on leasehold in Westminster.

Mr Paine sold informal lease extension of 99 years with ground rent doubling every 10 years. On completion, the leaseholders found the 99 years started from when the lease was originally granted, so the length of the lease remained the same but the new ground rent due was £8,000 a year making the flats worthless. Read the full story here.

Taylor Wimpey found themselves with a mountain of negative PR when it was brought to light that they had been selling houses as leasehold, instead of freehold, for the sole purpose of making themselves more profit while plunging their unsuspecting clients into a life time of unnecessary ground rent debt.

The telegraph also ran a story which we have been involved with which was a leasehold flat in Islington where grounds rents starting at £250 per year per flat would grow over the term of the 999-year lease to… £68,719,476,736,000 a year! A bargain.

So what does 2017 have in store for leaseholders?

I hate to be the bearer of more bad news but it looks like the freeholders are going to try to push their advantages even further next year using lower interest rates as a smoke screen to mask their naked greed.

In late 2016 we are already seeing the ‘professionals’ advising the large freeholders to try and argue lower capitalisation rates, which are used to calculate the ground rent due to a freeholder to compensate for the loss of ground rent, than those currently accepted.

An even bigger battle is brewing over the deferment rate which was set by ‘Sportelli’ in 2007. The deferment rate is used to calculate the amount due to a freeholder to compensate them for the reversion of a property. The lower the rate, which is currently 5%, the more you will have to pay the freeholder, a 1% reduction in this rate would have huge financial consequences for leaseholders across the country.

Potentially these will be one of the battle grounds of 2017 as bloated greedy freeholders look to get paid even more for a lease extension from their legally captivated victims the leaseholders.

Is there any good news at all?

unfairFor the first time in over a decade those fine people at the Leasehold Knowledge Partnership were the driving force to secure a debate on leasehold in Parliament a couple of weeks, ago which was a fiery damnation on the state of leasehold in this country.

To finally have political appetite looking at the injustices of this feudal system is a very good thing and may be the tool to fight the coming battles from greedy billionaire freeholders wishing to push their advantages.

With the political appetite comes serious interest from the press looking to expose even more of the dodgy dealings of these wealthy freeholders who live in the shadows while carrying out legal extortion on many millions of leaseholders. I have spent more time talking to the press about various leasehold scams in these last two months than I did for the previous eight years combined. There are some big exposés coming in 2017!

Finally, leaseholders themselves are becoming better informed and educated about leasehold abuses. If you find yourself in an unfair situation with your freeholder, make some noise about it! Contact your local MP and let them know, write to the papers, contact LKP and join the growing army of people demanding that this thousand-year-old feudal system should be ended once and for all.

©Barcode1966 – 2017

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The Truth About Virtual Freeholds

‘Virtual freehold’ has fast become the ubiquitous term that is used to describe a leasehold property with a long lease of, usually, 999 years. You regularly see it used in estate agent’s descriptions, developer’s brochures and auction houses.fullsizeoutput_479

The term suggests that you don’t need to be afraid when buying a leasehold property. It implies that this property won’t share the same nightmarish financial consequences that can exists with normal leasehold properties and that there is a good chance that this freeholder is ‘honest’ to grant you such a long lease in the first place.

Buying a ‘virtual freehold’ property can become a real nightmare though with terms so onerous it can seriously affect the future salability of your property and here’s why.

How big is the problem?

An excellent article which appeared in the Guardian, 29 October 2016, entitled ‘The new-builds catching house buyers in a leasehold property trap’ exposed the scandal of Taylor-Wimpey selling leasehold houses. These houses were being sold as ‘virtual freeholds’ with a 999-year lease but with onerous ground rents clauses which doubled regularly making the houses difficult to sell as the ground rent due per year becomes disproportionately high.

This is just the tip of the iceberg though.

For many years we have been aware of this very same tactic being used on tens of thousands of newly built leasehold flats across London.

For example, we helped a group of flat owners buy the freehold of their flats in Islington a couple of years ago at a newly built block. The ground rent clause was £250 a year doubling every 25 years for 999 years. We calculated the ground rent due for the last 25 years of the lease was £160,000,000,000 a year, a bargain!

Why do developers grant 999-year lease with high ground rents?

Developers generally sell the freeholds of their leasehold buildings before building work starts to professional ground rent investors. These investors want to make as much profit as possible from these freeholds so they request certain clauses are included in the leases before they buy. The developer will then also be able to sell the freehold for a much higher fee if they agree to include them.

For example, if a developer builds a block containing 200 flats and includes a standard ground rent clause that states the ground rent will be £100 a year doubling every 25 years, the total combined ground rent of all the flats that would be brought in over the first 100 years would be £7,500,000.

If they included a clause that states the ground rent will be £350 a year doubling every 25 years, the total combined income rises to £26,250,000! It’s easy to see why they do it.

The reason the leases are granted for 999 years though, is a stroke of pure evil genius from toxic unscrupulous freeholders. This is done to totally remove the motivation for the flat owners to ever group together and buy the freehold of their build meaning the freeholder loses their investments and feel sad.

fullsizeoutput_477It is done to ensure the freeholders retain permanent ownership of the property and it allows them to make lots of money from their captive leaseholders.

That’s because there are other ways a predatory freeholder can make money from leaseholders who have bought flats with these lease terms and it’s like shooting fish in a barrel for the freeholders.

Other ways freeholders can make money from ‘virtual freeholds’

A knowing freeholder can make even more money from service charges which tend to be high on new builds. Closely managing a building and having a separate company that carries out the work can be a gold mine for them. A cursory search on Google will reveal a depressingly high number of reports and court cases documenting these abuses.

Generally, these leases will also give the rights to insure the building to the freeholder who can then recover these costs from the leaseholders. We regularly see freeholders recommending a poor quality of insurance with high excess fees while they pocket, in our experience, 50% of these costs as ‘finder’s fees’.

Fees for licences and permissions can also bring in a considerable amount of profit to freeholders. We regularly see permissions to sub-let on these properties costing more than a thousand pounds a year. The cost of the permission legally required to sell a property from a freeholder, can often dwarf the total legal fees paid for conveyancing the sale of the property!

Leasehold houses too can see the cost of permissions being ridiculously high, we were speaking to the owner of a leasehold house recently who was being asked to pay the freeholder £15,000 for permission to build a conservatory on his own property!

What can you do about it?

fullsizeoutput_47bIt is assumed that most leaseholders wanting to buy a nice new shiny leasehold house or flat will probably not fully grasp the serious financial implications of owning a ‘virtual freehold’ property with onerous clauses until it’s too late.

Therefore, the only risk for developers in acquiescing to the freeholders demands for onerous ground rents and lease terms, is if the public find out and make a noise about it.

I’m sure Taylor-Wimpey are currently regretting selling leasehold houses with onerous ground rents due to the tsunami of bad press they are currently receiving.

So if you find yourself owning one of these flats or houses with these terms contact the developer and ask them why they did it. Get together and contact the press.

If you bought your flat on or after 1 October 2015 you are covered by the Consumer Rights Act 2015. This Act applies to the terms of a lease and if it is proved that the financial implications of a lease term were not fully explained to you, it would no longer be binding on you. If you group together with your neighbours you can split the cost of the legal fees of proving this.

If you bought your flat prior to 1 October 2015 you are still covered by Unfair Contract Terms Act 1977 and you could get legal relief from these onerous terms if you can prove they are unfair.

Did your solicitor clearly inform you about the real implications of the terms of this lease when you were purchasing the property? If they didn’t you could have a claim against them for professional negligence and there are many easy to find guides on how to do this available.

Think about buying the freehold of your building and ridding yourself of the freeholder once and for all. Although the ground rent is high so the compensation you would have to pay the freeholder would be higher than normal, there is no reversionary interest to pay nor marriage value meaning it would be much cheaper to buy the freehold if you have a 999-year lease than it would if your lease was just 99 years long.

Write to your MP. The only real way to bring lasting change to the hugely flawed leasehold system is to change the legislation that surrounds it. This change can only come about when there is political appetite for change and sadly, I do not believe that exists right now.

If it did though it would stop this legal money making scam at the expense of leaseholders, once and for all and all of us can collectively add our voices to this demand and make a difference.

©Barcode1966 – 2016

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Upper Tribunal takes billions away from leaseholders and gives it to freeholders on ‘flawed relativity’

Banner-LogoLast week the Upper Tribunal handed down its decision on a case that is known as ‘Hedonic Regression’.

Due to its complex nature only a small number of people seemed interested in it and fewer still understood the importance of the decision. It is no exaggeration to say that the implications and fallout will trigger the biggest transfer of wealth from leaseholders to freeholders since 1066.

Once the lease length of a property has fallen below 80 years it is said to be worth less than its full value. For every year the lease length continues to fall it loses even more of its value. This is known as ‘relativity’.

When a leaseholder extends their lease, they are directed – by law – to pay 50% of the resulting uplift in the property’s value; the lower the relativity, the more money the freeholder receives, so it has always been in their interests to ‘prove’ low relativity.

Some two decades ago, a number of London’s landed estates decided to commission the development of their own relativity graphs. These graphs, produced by chartered surveyors and estate agents (no, really!), would offer ‘evidence’ from lease extension cases with which they had dealt, but which obviously ‘proved’ low values on flats with low leases. This ‘evidence’ and the resulting ‘methodology’ would then ensure they were able to squeeze much more from their leaseholders.

These mighty freeholders had the wealth and power to ensure that their flawed graphs were used at the Lands Tribunal time and time again until such time that they were ‘accepted’ as viable methods or even ‘industry standard’.

For example, the Gerald Eve Graph (GE) is widely considered to be the ’industry standard’ even though the ‘Hedonic Regression’ decision says of it:

 “The GE graph was adjusted subjectively” (65, p78); that it was “directed to the particular requirements of the Grosvenor Estate” (65); and the “Grosvenor Estate had received relatively favourable settlements” because of it(8, p67)”.

So, no proof offered, no evidence given, subjectively altered to suit the pockets of the central London estates but at the same time accepted as the ‘industry standard’.

This clearly means that leaseholders have been railroaded into paying more for their lease extensions than they would have if a less subjective way of calculating the real fall in the value of a property with a short lease were in place.

Parthenia, headed by James Wyatt FRICS, produced a graph that did that very thing, that was less subjective and based on real evidence. It used real evidence from the sale of flats in Prime Central London and by using nearly 8,000 pieces of evidence, tried to calculate this loss of value scientifically and remove the subjectivity of wholly partisan practitioners.

Once the freeholders had sight of the results of this statistical analysis, two things became immediately apparent. Firstly, leaseholders had been paying already bloated freeholders considerably too much for their lease extensions for decades. Secondly, these freeholders would be prepared to do anything in their power to stop this new relativity graph ever from being accepted, as it would wipe billions off the value of their property portfolios. So stop it they did.

The decision, an 80-page tome, was handed down last week and it must be singularly the most partisan, hypocritical and disingenuous legal decision for decades.

In a further overreaching pronouncement (which in gravity matched the orders to destroy the city of Tyre) they state “[the HR model] should not be put forward in a future case as a method of valuing [a lease extension] (165,p43)”. They wanted to exterminate this valuation model that was not only fair, but favoured leaseholders.

It examined the Parthenia model in eye-watering detail, with experts lining up to disprove it; the Wellcome Trust alone is rumoured to have spent many hundreds of thousands of pounds on its legal defence, even though the total disputed amount of this case was only £180,000. The judges subsequently rejected Parthenia’s model for ever for having some technical errors, which they stated could never be righted. This was experts gleefully ruled against its use on the basis that it was “unscientific” and it failed some of the tribunal’s ‘necessary technical tests’. This was setting very high standards indeed for relativity graphs. They helpfully reviewed all other existing graphs in Appendix C (p66) so how did the others fair?

In Appendix C, the judges cheerfully assassinate all the other ‘accepted’ relativity graphs the sector on which the sector relies.

The GE graph was “altered subjectively” (63, p77); achieving “favourable settlements”(8,p67) for the freeholders who funded the graph; of the College of Estate Management (CEM) graph, “there was no evidence that …had used it” (67, p79); John D Wood was based on LVT decisions and where there had been “concerns expressed over whether the LVT decisions always produce a correct valuation”(43,p74); The WA Ellis graph just reflected “the opinion of three of that firm’s partners” (69, p79); Charles Boston’s graph would “reflect any personal bias” and the Cluttons graph was “a moving average” (70, P79)!

The staggering hypocrisy, circular logic and Kafkaesque graph-011reasoning of the decision is right here; although all of the above graphs are proven to be unscientific, subjectively altered to suit their freeholder clients, and based on opinions and personal bias and nothing else.

Nowhere does this decision say that these flawed graphs a “should not be put forward in a future case”, no that judgment is reserved just for Parthenia’s model alone!

Worse still is the fact the failings of these graphs are mentioned as some dry mathematical calculation, which are undeniably slanted to favour freeholders. No mention is made of the fact that it is leaseholders who have had to pay inflated prices for lease extensions because of these graphs – and to the tune of many millions of pounds. The human cost of these subjectively altered graphs is a scandal, which is completely ignored by this case.

If, for example, a building firm had overcharged a little old lady for roof repairs to the same degree, they would have several episodes of Rogue Traders dedicated to them and a two-page spread in the Daily Mail, not to mention a special place in a police cell reserved for them!

If we can’t use the Partnenia model, nor any of the other fabricated relativity graphs we have relied on, how do we calculate relativity from now on?

Here comes the next inexplicable part of this decision, which, again, favours the freeholders and makes sure leaseholders pay for it.

There are two types of evidence used when trying to plot relativity data for leasehold properties. The Leasehold Reform Housing and Urban Development Act 1993 states the values should take place in a ‘no Act world’ arguing that once the Act come into being it affected the values of short lease properties. Therefore, the pure sales data used should come from before 1993. These are referred to ‘without rights’ properties.

The second type of data is ‘with rights’ (post-1993 evidence). Once this data is collated, it then needs to be adjusted down to guestimate the percentage difference between ‘with rights’ and ‘without rights’ values.

Remember, the lower the relativity percentage the more money the freeholder makes.

Well, the judges in this case seem to indicate that we should use a ‘with rights’ graph and then someone with a fancy London office, who represents the freeholder, uses their considerable experience to guess how low the percentage should be.

What could possibly go wrong with that method?

Although the judges mention the Savills 2002 graph as flawed but good (it has very low relativity rates) it seems they and the freeholders are all waiting expectantly for the new, improved Savills 2015 ‘with rights’ graph. This is also a relativity graph based on the Hedonic Regression method of valuation. Although this model, like Parthenia’s model, currently has technical faults, the judges for some reason do not proclaim that this graph should be cast out forever.

It may be worth mentioning at this point that the Savills 2015 graph “was produced specifically to be part of the Wellcome Trust’s evidence in relation to flat 5 [of this case]” (54, p75).

This is really bad news for leaseholders as this graph agues even lower relativity than the Gerald Eve graph, etc. and the rates can be argued down by an ‘experienced valuer’ to calculate how much lower this should be to account for the ‘no act’ world.

It is, however, good news for freeholders and good news for valuers, solicitors and barristers as this will lead to more litigation, which just like this judgment will come down in favour of the billionaire freeholders.

This case has been a dream result for the Wellcome Trust. If the court room was situated in Wellcome’s offices and the judges were salaried employees of theirs, they could not have got a more favourable result! They disproved the Parthenia Model, got it banned ever from being put forward in the tribunal again. They won the actual case on the three disputed flats and they got their mates, Savills, to produce a relativity graph that the judges loved and recommended we all use from now on, which lowers relativity even more in their favour. That really was a good day at the office.

Can it really be acceptable that two part-time judges who preside over the humble Upper Tribunal have the authority to make a judgment which affects property values across the whole country without political debate or the need for legislation?

Can it be fair that the methods used to ‘prove’ that this transfer of wealth from leaseholders to the establishment is based, by their own admission, on flawed evidence?

1528622_10152538665934745_1047791817_n1-150x150Can there be no redress to this decision? It irresponsibly casts doubt on the current flawed method of valuation while offering no viable alternative, thus opening the door to prodigious amounts of litigation to establish valuations which almost always favour billionaire freeholders?

Surely we need a judicial review as a matter of urgency before the ridiculously unfair and antiquated leasehold system we have in this country takes on a new more sinister twist.

This decision on relativity, which has just been fixed even further to favour freeholders is the LIBOR scandal of the property world.

©Barcode1966 – 2016

 

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