barcode1966

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

The truth about legalese in leasehold

Why do we get more legal protection as consumers when we buy a cheap mobile phone for £10 a month than we do when we buy a flat for four million pounds?

6a016306ae679a970d016769195101970bWhy is it so difficult to read and understand the terms of a lease?

Does anyone else find it odd that the leases which lay down the details for leasehold property ownership, the terms and regulations on how we can live in the property and the very important small print that can
have significant financial implications, are all purposefully written in a way meant to obscure their meaning?

In every other area of our consumer lives the laws protecting us are tightening up, culminating in the recent Consumer Rights Act 2015, as legislation looks to legally protect the consumer from unscrupulous business practices and see that they not tricked confused mislead or ripped off when signing a contract.

One of the few types of contracts being excluded from the draconian Consumer Rights Act 2015 is the lease of a property which seems odd. The Act states that the only contracts that are legally excluded from being protected by the Act are contract that relate to ‘the creation or transferal of property’.

Why is that?

Why is the contract, that involves the biggest and most important purchases of our lives, purposefully excluded from legislation that is designed to protect us from the crooks?

Let’s look at a real example of this.

Imagine you have bought a flat and you want to look at your lease to see how much your ground is, how much it will rise to and when, which should be a pretty straightforward thing to do surely?

All these details are contained in your lease so you settle down with a cup of tea and a copy of your lease and start to read.

It may firstly take you a few seconds to establish if you are the lessor, landlord, lessee or tenant. Once that is done you can proceed.  18m9x8

(The details below come from an actual lease which I had on my desk at the time of writing, I didn’t choose it because it was overly complicated it was just one that had been printed out, I’ve seen more complex ones than this)

So remember you are looking for how much your ground rent is, what it will increase to and when. Here is what the lease says:

“Schedule Four

Rent payable hereunder by the tenant

  • “The rent shall be fixed for each of the following periods:

First period                 First 25 years

Second period            26th to 50th years

Third period                51st to 75th years

Fourth period              76th to 100th years

Fifth period                  101th to 125th years”

So that is the timing for your ground rent schedule, a little convoluted but it isn’t impossible to comprehend.

So first bit done, now much is the rent? The lease continues to explain it for us.

“For the first period the rent shall be two hundred and fifty pounds per annum”

Crystal clear! That’s not difficult to follow at all! What’s all the fuss about? This lease reading business is a doddle!

What happens after the first 25 years though?

“For each subsequent period the rent shall be the value of the ‘current rent guide’ (which is defined below) on the last day of the previous period

  1. Initially the current rent guide shall be computed by the formula

                                                             250.00 x          A

                                                                                       B

Where A is the most recently published value of the general index of retail prices complied before the 1st of June 1988

The said formula shall continue to be used notwithstanding that its name be changed or that it be published by a different department so long as the government for the time being continues to compile and publish it on substantially the same basis as the date hereof”

All you want to know is how much is your ground rent is going to increase by in the future. What is all this A over B nonsense?

It now looks a tad confusing but have no fear it looks like number 3 Is going to shed light on the whole issue.

“3. If in circumstances set out below the index used for calculating the current rent guide shall be changed it shall therefore be computed by the formula

                                                            R x       C

                                                                        D

 Where R is the most recent value of the current rent guide at the date of the change of index:

 C is the most recently published value of the new index

And

D is the value of the new index on the date of the change of that index.”

I hope that is now clear to you all, it’s as easy as RDC.

I know what you are all worrying about now though, I can worryingly hear you all asking the question collectively “What happens if Retail Prices are recalibrated?

Well don’t worry about it for a second as the lease makes it very clear what you need do!

“4. If the General Index of Retail Prices shall be recalibrated it shall be deemed to be a change of index for the purpose of foregoing paragraph”

If you are thinking that could possibly have been explained a little clearer then worry ye not, as the lease includes a rather helpful example.

“Explanatory Example

If on the last day of October 1990, when the index stands at 425, the Department of Employment resets the Index to 100, the current rent guide will be

                                                            250.00 x          100 equals 58.82

                                                                                    425

so that immediately thereafter it will become

                                                            58.82 x            C

                                                                                    100

where C is the current value of the (recalibrated) index”

Pretty clear I’m sure you will agree. You now know your ground rent timings, how much it will rise by per schedule and what will happen if the Retail Prices are changed or recalibrated.

Wait! good God man! What will we do if the Retails Price Index is cancelled? Like me, you probably wouldn’t be able to sleep tonight if we don’t find an answer to this burning question but once again the lease comes to our rescue.

“5. If the index currently being used for the purpose of computing the current rent guide shall cease, then both the Lessor and Lessee shall use the new index of the closing middle price of gold sovereigns of the weight and fineness set out in Schedule 1 of the Coinage Act 1971. The said closing middle price shall be the price quoted at, and published with the authority, the London Stock Exchange”

20150820-Legalese-is-optional-you-can-write-a-contract-400x532I can’t help feeling that the terms of the lease are a little slapdash as they do not explain how the ground rent uplift should be calculated if the London Stock Exchange is ever closed or if England were to sink into the sea or we are taken over by aliens from another planet who replace our current currency with monkey nuts but I’m afraid it’s all we have to go on.

What nonsense this all is. Why is it allowed to continue like it has? Why can’t leases and legal documents be protected by the same consumer laws that protect why we sign up for a loan? Why can’t they be written in clear understandable way that anyone can understand?

The average leaseholder would probably feel compelled to take some sort of legal and valuation advice on the above terms, and have to pay handsomely for the privilege, to feel secure in their decision to purchase the property.

A MORI poll published in May 2016 found that 21% of people paying for legal advice sought advice on issues surrounding property ownership (excluding conveyancing). That’s a good little earner for solicitors right there, how much do these obfuscated legal terms found in leases contribute to this figure?

We all seem happy to accept the fact that the lawyers we pay to write lease terms in legalese are the only people who can translate these terms back into English for us, for a fee. It’s ludicrous.

How would we all react if suddenly all mobile phone contracts were written in Klingon and we had to pay a Klingon expert £300 per hour to translate the contract into English for us? (With a small print caveat to say that “Although we have retained to translate this mobile phone contract from Klingon into English for you, we cannot be held financially accountable if in fact it turns out that our advice is in Betacrypt as we acted in good faith blah blah blah)

How much easier would it be for the leaseholder if the terms of the lease were written in a no-nonsense way designed to be understood by all? For example:

“1. The ground rent schedule for your property is as follows:

Your Ground rent is £250 per annum for the first 25 years of the lease. This increases every 25 years in line with the Retail Price Index.

If the Retail Price Index is recalibrated, then we will divide the new rate with the old rate to ensure that the ground rent increase is fair and proportional”

Imagine if all the terms of your lease were written in the same, clear manner and were written in such a way that everyone could understand their meaning and be able to make informed decisions as to property ownership and the small print that governs leasehold life.

One of those conspiracy theorists people would say that this is all done on purpose to ensure that flat owners don’t understand what they are signing up for and so get ripped off by predatory billionaire freeholders who use legalese to their financial advantage on a daily basis.

Of course, I am wearing a tin foil hat to protect my brain from these conspiracies and so I don’t subscribe to this view at all.

Complaints procedure for the article above

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©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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The truth about freeholders’ dirty tricks

The following blog lists many of the ways freeholders and their oily solicitors and valuers use underhanded tricks to gain unethical, financial advantages over flat owners when extending leases.

I am Managing Director of a company that carries out the most lease extensions per year, on behalf of flat owners, in this country.

As such, I oversee the extension of thousands of leases each year and it is truly nauseating to see multi-millionaire freeholders regularly use unfair advantage and deficiencies in leasehold legislation as weapons to wring even more money from unsuspecting flat owners.

This is intended as a leasehold flat owner’s guide to some of the main tricks used and also give some tips on the best ways to counter them.

Trick #1dr-evil-freeholder

The freeholder’s counter offer will be huge!

Why is it unfair?

You must legally make an opening offer for the cost of your lease extension and your offer has to be ‘reasonable’. The freeholder does not have the same limitations when making their counter offer, it can be as big as they like! It is often a disproportionately large amount!

It is an unethical ploy.

Why do they do it?

Firstly, they hope it will be so shocking compared to the amount your valuer told you to expect to pay that you will withdraw from the transaction altogether.

If that ploy fails, their second hope is that it stretches your expectation of what the final amount is you will have to pay.

Thirdly, you may often find that an offer of an informal lease extension directly follows a high counter offer. (Click here for my full rebuttal of informal lease extension offers)

How can you counteract it?

I see many people, who are not necessarily clients of ours, become very upset and agitated when they receive the counter offer.

The way to counteract it is to expect the counter offer to be ridiculously high and completely ignore it when it arrives as it is 100% stuff and nonsense.

Also, do not take their informal offers!

Trick #2dr-evil-freeholder-6yhf0a

Freeholders completely ignore the flat owner during the six-month period of negotiation.

Why is it unfair?

During the six-month period of negotiation in the statutory time frame of a lease extension, the cost of the lease extension and the terms of the lease MUST be agreed.

If not, the flat owner has to pay to make a protective application to the FtT to extend this time frame or lose their legal right for a lease extension.

If the latter were to happen, the flat owner would have to wait 12 months before they could start the lease extension process again and they would be liable for all abortive legal and valuation fees for both sets of solicitors and valuers.

The flat owners must pay to make this application regardless of the fact that the delay may have been purposely caused by the freeholder!

Why do they do it?

To be nasty.

It is pure bloody-mindedness as freeholders know the flat owner will have to pay these additional fees and they will never be charged or brought to task for acting in such an unreasonable way.

It is a way of punishing flat owners for daring to want a lease extension and letting them know that the future negotiations will be brutal for them.

How can you counteract it?

Negotiate how much your solicitor will want for them to serve an FtT protective application on your behalf, BEFORE you agree to use that particular solicitor.

You will get the work involved in the application much cheaper by negotiating while the solicitor is quoting upfront to get your new business than as opposed to this arising once you are a client of the solicitor.

If possible, try to extend your lease at the same time as many of your neighbours as possible and negotiate group discounts with your proposed solicitor and valuer.

Trick #3dr-evil-freeholder-vg9ny1

Freeholders refuse to enter into negotiations on statutory lease extensions; instead they try to bully the flat owner into accepting their ‘easy’ informal offer.

Why is it unfair?

You have a legal right for a lease extension of an additional 90 years with zero ground rent. Freeholders try to distort this right by making the statutory route seem so difficult and fraught that the ‘informal’ route seems the easiest or only option.

Why do they do it?

If you extend your lease by way of your statutory right the freeholders lose their investment, your flat, and their chances of making even more money from you.

If you fall for their trick and accept the informal offer, they will make an absolute fortune from you in the future for decades to come.

How can you counteract it?

Don’t accept their informal lease extension offer, even if your freeholder is telling you to accept it. Do your own research, read my blog or watch my video.

Trick #4dr-evil-freeholder-iqik2b

The freeholders try to include new terms into your lease, which hugely favour their own interests.

Why is it unfair?

Your freeholder does not have a legal right to insert new clauses into a lease during a statutory lease extension. They try to sneak them in by ensuring the new lease is sent back to your solicitor very close to the statutory deadline.

This means your solicitor will have to inform you that if you do not accept the illegal terms inserted you will have to pay court fees.

Why do they do it?

For a variety of reasons. In the case of new licences they insert, they want to make more money from you.

They may try to insert new terms relating to the recoverable court fees through service charges. This could mean that if you sue them in the future (even if you win!), they can add their legal fees onto your service charges. Click here to read this horror story.

They will often include new terms that relate to breaches of lease terms and what actions they can take. Here they want more power over you, the ability to charge more fees and a better chance of getting forfeiture of your flat.

Are these new terms they are trying to unfairly insert in your lease important? You bet!

How can you counteract it?

As with Trick #1, negotiate the fees for these applications with your chosen solicitor before you agree to give them any work.

If possible, extend your lease at the same time as a neighbour or a group and negotiate a group discount before hand.

Instruct your solicitor that you will not accept onerous terms included in your lease.

If you go to the FtT to fight these inclusions you will win outright, as your freeholder is breaking the law by including them in the first place. They will never want to attend the FtT to argue their right to include new terms – they are just trying it on.

Trick #5dr-evil-freeholder-7u7l4x

The cost of the lease extension.

Why is it unfair?

The freeholder is entitled to receive the combination of ground rent, reversion and marriage value, as set down by law, as the ‘fair cost’ of a lease extension.

However, they will often add a fourth element of the valuation; that is, how much it would cost you to take them to the FtT to argue the much higher costs they have settled on, refusing to negotiate further.

This unfairly revolves around the fact that the flat owner will have to pay to challenge an unreasonable freeholder and the costs of doing this are considerable.

Why do they do it?

To make more money from you.

How can you counteract it?

Extending your lease at the same time as your neighbours is one of the few counter measures to this unreasonable action from a freeholder. Ensure that you have negotiated group discounts for multiple applications.

If you are not part of a group it is tougher but encourage your valuer to keep negotiating and keep the lines of communication open with your freeholder.

It can sometimes work to bluff the freeholder in thinking that you are happy to attend the FtT on a point of principle, as no one wants to actually attend the FtT – it is just a big bluff.

Trick #6dr-evil-freeholder-x27jzf

Absurd Section 60 costs!

Why is it unfair?

The flat owners have a legal obligation to pay the ‘reasonable’ legal and valuations fees incurred by the multi-millionaire during this process. These are the freeholder’s Section 60 costs.

Many of the professionals who work for the freeholder view this as a free hit and charge the flat owner far too much for their services.

Another shameless trick perpetrated by the valuer who works for your freeholder relates to his own fees. The valuer may only agree on the cost of the lease extension if you first agree his personal, much inflated fee for the work he has done. That way he ensures he will be paid handsomely for his couple of hours of work.

This one disgusts me to the core; not only are they being pig greedy, but they are selling out their own client for their personal gain. Nice! (To see how to get over this trick, read to the end)

Why do they do it?

Simply put it is pure greed. This is considered one of the benefits for representing the freeholder for professionals, i.e. the chance to charge what they want for their work.

Furthermore, the nastier valuers and solicitors become when they represent freeholders, the better a chance they have of getting more work from them, and hence the tricks I list in this article.

How can you counteract it?

Always challenge Section 60 costs! It is a written challenge that needs to be submitted to the FtT by your solicitor, so generally no one needs to attend the court.

Be aware that challenging Section 60 costs is not always a popular thing to do for some solicitors, as they could find themselves on the opposite side of the fence a week later.

Some solicitors are afraid that their arguments of this week could be used against them next week, to reduce their own fees.

Obviously, neither you nor I should be concerned about this. A solicitor’s duty of care is to get the best possible deal for their client – you! It may be prudent to clarify with your solicitor when you are looking to engage them that you will want them to challenge unreasonable Section 60 fees as part of the transaction.

How to deal with the solicitors and valuers of the freeholder.

imagesI can tell you, from personal experience, that many (but not all) of the professionals who represent the major freeholders are awful, amoral people. They will, however, argue until they are blue in the face that they do not do anything illegal but it is in fact the flat owners who are the problem by daring to want a lease extension in the first place.

Well here is a little-known fact. You have a legal right to complain about the freeholder’s solicitor and valuer if you have evidence that they have not acted honourably.

You may also be very glad to know that it is a very big deal when you complain about a solicitor or valuer to their professional bodies!

For valuers, click here and complain directly to the RICS about the actions of the valuer. The RICS has a code of ethics which state: ‘Members shall at all times act with integrity and avoid conflicts of interest and avoid any actions or situations that are inconsistent with their professional obligations’.

For solicitors, their code of ethics state that they must: 1 Uphold the rule of law. 2 Act with integrity. 3 Not allow their independence to be compromised. 4 Act in the best interest of each client.

If you feel you have not been treated fairly, you will firstly need to trigger an internal complaint for that solicitor. Solicitors have to take this very seriously indeed and will probably inform their PI insurers too. The PI people become a time-consuming nightmare for solicitors.

If you are unhappy with the result, you can complain directly to the SRA by clicking here.

Conclusion

Anyone with an ounce of decency will be disgusted by an industry and their ‘professional’ advisers, who gleefully use a whole raft of inequitable tricks to gain a dishonorable and immoral advantage over flat owners.

I wish I could say the above is a definitive list but, sadly, it is not! I didn’t want to write a ‘how to be a bastard freeholder’ guide here though so I focused on the most often used tricks instead.

I genuinely hope the above information will help you when you are extending your lease. To be forewarned is to be forearmed.

The above text is from a (very unpopular) speech I gave for the Leaseholder’s Valuers Forum, at the Law Society 12/11/2015.

©Barcode1966 – 2016

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The truth about informal lease extensions

bp-carrot-stickThis blog is an in depth examination the real implications of accepting a non-statutory or ‘informal’ lease extension from your freeholder.

I apologize that some of this information is complicated and difficult to follow but please bear with it because your freeholder trades on the fact that you probably won’t be able to understand it, so make sure you prove them wrong!

Informal or non-statutory lease extension are deals offered to you by your freeholder when you wish to extend your lease and they are designed, at first glance, to make it look like you are getting a deal!

Nothing could be further from the truth though. I call these informal offers ‘Trojan horse offers’. They look like a gift but when you look inside the details can be catastrophic.

The ancient city of Troy was under siege by the Greeks, and the siege had become a stalemate. The Greeks built a wooden horse and had some of its soldiers hide inside and pretended to leave. The inhabitants of Troy accepted the horse as a goodbye gift only to find that the soldiers sneaked out at night and let in the Greek army in and the city was lost.

This is a fair analogy of a freeholder’s informal offer, lets see why.

Your legal rights

If you have owned your flat for two or more years then you have a legal right to extend your lease by 90 years and reduce the ground rent to zero.

How to value a lease extension

The law says that you must compensate your freeholder three different ways when you extend your lease (or purchase your freehold)

  1. Ground Rent

This is the amount of ground rent you owe your freeholder in total for the remaining years of your lease, but calculated in today’s money;

  1. Reversion

This is the amount you would have to give your freeholder as a lump sum, so that they could invest for the remaining years of your lease (with an equivalent compound interest rate of, say, 5%), that would be worth the value of your flat – with a long lease – today;

  1. Marriage Value

This only applies if your lease has fallen below 80 years. If you extend your lease, the value of your flat will rise. The rise in value must be calculated and the total ground rent and reversion due subtracted.
Whatever is left is then split 50/50 between you and your freeholder.

In this blog I am going to use real figures from a flat I recently worked on and are going to use these figures as method of seeing the real implications of an informal lease extension.

The details of the informal are also real from a large, immoral, London based freeholder.

Our example is A1 Nice flat in London

  • The value of the flat with a long lease of 99 years £230,000.00
  • Ground rent £75.00 per year doubling every 33 years.
  • Current lease length 75 years.

The valuer recommends the following:

  • Ground rent total £2,143.00
  • Reversion total £5,849.00
  • Marriage value total £1,754.00

Total for lease extension £9,746.00

Add the total fees on top of this of £3,500.00

Total price £13,250

If you extended your lease using your statutory legal right then your lease would be 165 years with zero ground rent. The lease would not need extending for another 85 years and even then it would be very cheap as there is no longer a ground rent element to include in the calculation.

The lease length issues of your flat have been rectified once and for all and there would be no future value in your flat for your freeholder.

Your statutory lease extension from your freeholder’s point of view.

Your freeholder is more than likely a ‘professional’ freeholder (which is a euphemism for immoral, cheating, money grabbing bastards). money_quote

They bought the freehold of your building to make as much money as they possibly can from each flat.

They make money the following ways:

  • From immoral licensing fees hidden in the terms of your lease.
  • By ripping you off by claiming a ‘finders fee’ they get back from your building insurance, which you have no choice but to pay them for.
  • By syphoning off service charge fees.
  • From the ground rent you pay to them each year.
  • The money you have to pay them for a lease extension.

You extending your lease is the big pay day for them and if they can fool you into accepting an informal lease extension it will turn into tens of thousands of pounds for them. If, however, you extend your lease by an additional 90 years and reduce the ground rent to zero, this basically wipes out all the future profit they will receive from your flat.

They really do not want you to do this.

They want you to accept their ‘Trojan’ lease extension deal.

What does an informal lease extension look like?

I would like to state, emphatically, for the record that you do NOT have a legal right for an informal lease extension. Please bear this in mind, we will return to this many time in the rest of this examination.

There is another way you can extend your lease and that is by contacting your freeholder directly (or many times they will contact you) as soon as they are aware you want to extend your lease.

Below is an informal lease extension offer from the freeholder for this flat.

Dear Mr and Mrs Naive

We are happy to offer to extend your lease back up to 99 years for the inclusive price  of £10,200 and our total legal and valuation fees will be an additional £1,000 pus VAT.

The ground rent will be £250 a year doubling every 10 years.

We will are not looking to amend your lease in any way, we will only modernise the terms of your lease. We are able to complete this process in two months.

This offer is valid for thirty days from the date on this letter.

What this offer looks like at first glance

Wow, it appears that the freeholder is a nice guy after all! The total price he is offering is £10,200 plus fees of £1,200 (Total £11,400) saving you £1,850 pounds to extend your lease back up to 99 years.

Ground rent is just £5 per week and they only want to modernise the terms of your lease.

They will complete this whole thing in three months (instead of a year if you extend using your statutory rights) This is brilliant, “Where do I sign?”

That’s why I call these offer Trojan offers, because the devil is in the detail.

Let’s examine this offer more closely.

The term of the lease extension

The freeholder generally offers to extend your lease back up to 99 years and this seems like more than enough for most flat owners.

There is a very real reason freeholders only offer an extension back up to 99 years and that is because in 17 years or so, someone is going to have to extend the lease of the flat again.

greedy-man-300x199That means the freeholder gets paid a second (and third and fourth) time to extend the lease, something that would not happen if the lease had been extended by the statutory route.

As we will show later in this blog, the details of the informal offer they have offered here means that whoever is unfortunate enough to own this flat when the lease needs extending again in 17 years, is going to have to pay an absolute fortune for the privilege.

Beware of another trick the freeholder does regarding the term of the lease, they may offer you a 125 year lease extension which seems like it could be a much better deal for the flat owner.

They omit to mention that the 125 year extension starts from when the lease was originally granted NOT your 74 year lease extended up to 125 years!

If you are unhappy with this, you have no legal recourse to argue with your freeholder. You do not have a legal right for an informal lease extension it is a take it or leave it deal.

The future implications of ground rent

£250 a year doubling every 10 years does not sound like a lot of money, but it is.

A ground rent schedule like this is considered an onerous ground rent schedule, which could easily affect the future salability and value of the flat. This is because the freeholder is going to make money two different ways from this increased ground rent.

Firstly, the ground rent he will get extra before someone extends the lease on the flat again. If the ground rent is £250 per year, then the freeholder will make £2,500 extra that he would not have if the flat owner had used their statutory rights for the next ten years and then it doubles, then doubles again and again.

That’s not the big money for the freeholder though. The big money comes from the fact that someone is going to have to extend the lease on the flat again, only now, instead of the ground rent being £70 a year like it is now. The ground rent is now £1,000 a year!

So how much will the freeholder make over the next 24 years because they tricked the flat owner into the informal offer?

  • Cost of the lease extension = £10,400
  • Legal fees = £1,200
  • 10 years @ £250 ground rent = £2,500
  • 10 years @£500 ground rent = £5,000
  • 6 years @£1,000 ground rent = £6,000
  • Cost of the lease extension = £76,500
  • Plus legal fees @ £2,000 =£2,000

Total received by your freeholder over 24 years = £103,600

Compare this to the £13,250 you would have spent to extend your lease for an additional 90 years with zero ground rent forever more.

The initial saving of £1,850 your freeholder waved under your nose has turned into £90,000 profit for him, not a bad business being a freeholder is it?

Just to be very clear, when a freeholder increases the ground rent he makes money two different ways, the actual ground rent he collects each year and the future value of a lease extension with an onerous ground rent clause.

A future freehold purchase

Another ploy by predatory freeholders is to offer informal lease extensions to flat owners when they know they are going to sell the freehold of the building. They offer an informal and you pay them £10,200. A year later they offer to sell you the freehold of your building. How do you calculate your share of the freehold purchase?

You have to calculate the ground rent and reversion elements we talked about at the start of this blog but your ground rent is now huge and doubling every 10 years. You will end up paying more than £10,200 to purchase your share of the freehold!

Note: If you had extended using your statutory rights your there is zero ground rent, no marriage value as your lease is 165 years, so the only calculation is reversion but this is over 165 years. It would cost you about £250 to buy your share of the freehold!

There are also much worse offers you will need to watch out for with the ground rent. Here are some I see every day.

Onerous GR clauses

RPI

Freeholders will often ask for £250 a year rent, doubling every 10 years linked to RPI. RPI stand for the Retail Prices Index, which is used to measure inflation. Obviously no one knows what inflation will be in the future but one thing that is sure is that it will cost you dearly.

Not only will your ground rent double in ten years, someone will calculate what has happened to RPI over the last ten years and add it to your doubled ground rent!

Capital Value of flat

Freeholders will often ask for £250 a year rent, doubling every 10 years linked to 0.025% of the capital value of your flat.

After ten years not only will your ground rent double, your ground rent will then be linked to the actual value of your property!

Capital Value of the estate

Some of the estates in London have ground rent doubling every 10 years linked to 0.025% of the capital value of the estate, not just your flat!

Doubling every five years

We see more and more freeholders trying to fool people into signing informals where the ground rent doubles every five years.

This is just ridiculously onerous! Taking any of these deals could leave you owing a flat that no one wants to buy (except, of course, your freeholder who will be happy to buy it for a knock down price).

I worked out what effect this would have on a flat with a 999-year lease we worked on recently in Islington. The ground rent was £250 a year doubling every 25 years.

We worked out for the last 25 years of the lease the ground rent would be £165,000,000,000.00 per year! It is not just the future implications of the ground rent that you need to look out for if you are considering taking an informal (although that should be enough!).

Let’s look at the other areas we need to be aware of.

The terms of your lease

If you extend your lease using your statutory legal right, you are protected by law and your freeholder cannot alter the existing terms of your lease.

If you take up your freeholders offer of an informal lease extension you are not protected and your freeholder can make any changes he wishes.

‘Wait!’ you may cry ‘In the offer letter from the freeholder they state that they will not alter any terms of my lease, they will just modernise them!’

It does say that in the freeholders offer but in reality, what does the word ‘modernise’ mean?

I can tell you categorically that the word ‘modernise’ means whatever terms can be changed to benefit your freeholder. I see this every single day in my office.

It may be worth pointing out at this point that the saving your freeholder is offering you in this informal deal come from the fact that you will have no legal representation through this process.

They are telling you to not to have a lawyer protecting your interest through this process and they are then presenting this fact to you as if they are saving you money! Genius isn’t it?

The truth is though, there is no point in having a solicitor represent you in an informal as you do not have a legal right for it. It is a ‘take it or leave it’ offer so even if you find something you are unhappy about, there is no legal mechanism for you to remove it.

So what are the terms of the lease the freeholder is keen to change?

Put simply, anything that makes them more money and protects their position as your freeholder.

Licenses

They will insert additional licenses that mean you have to pay them to alter your flat, sell it, rent it out, renew the rental contract each year with your tenant, get cable TV, turn over to your left side in bed at night etc.

I spoke at a block of flats a couple of years ago at some flats close to West Ham tube station. One chap in the audience thought I was exaggerating the issues of informal lease extensions and he went direct to his freeholder for a flat he rented out.

He phoned me a few months later to say that his freeholder had instead added a clause in his lease, which said that he would have to pay the freeholder 10% of the rental income he receives each month, forever more. The chap wanted to know what he could do about this clause as he had signed it a couple of months before and were now chasing him for the money!

Some of the clauses of the lease the change could also have serious implications for the security of your flat and increase the freeholder trying to get forfeiture of your flat (which they love).

They may insert a clause in your lease, which says that if you ever take them to court, for whatever reason (even if your freeholder was caught committing service charge fraud) that the freeholder’s full legal fees can be reclaimed from you by way of the service charge.

If you sign the new lease, with these terms it is now your reality and you can’t alter it.

Be very, very careful regarding the terms of a lease and remember that even if you find bad ones your freeholder has tried to insert, there is absolutely nothing you can do to remove them.

Timescales

The other area to keep an eye on is timescales. You do not have a legal right for an informal lease extension and your freeholder can withdraw this offer whenever he wants, with no legal recourse at all.

Why would they do this?

There are many reasons a freeholder would withdraw an offer, but it’s always so they get more money from you. For example, if you were selling your flat and you have a buyer lined up and it all hinged on this lease extension, your freeholder may withdraw their offer claiming there was a mistake on the valuation and they now want £1,800 more.

Chances are you will just pay it!

Freeholders often do this when your flat lease length is about to go below the pivotal 80-year mark. The freeholder offers what appear to be good informal offers.

feudalism-e1397973878227They drag out the negotiations to the point when you do not have enough time to extend your lease through the legal process and then they withdraw their offer.

Your flat has now gone below 80 years and your freeholder’s investment has risen by thousands of pounds per flat. There is nothing you can do about it either.

I have lost count of the amount of times I have heard freeholder’s solicitors bragging about doing this to flat owners.

If you extend your lease using your statutory rights there are strict timescales that your freeholder must abide by.

Caveat emptor

I am shocked by how many professionals recommend that their clients accept informal lease extension without pointing out any of the above.

The big excuse used by all the professionals who recommend that their clients accept informal offers is ‘Why are you worried about the details, let the person who buys your flat worry. You save £1,800 that all you should care about. Caveat emptor!’

If a solicitor or valuer quotes you to extend their lease they have a year long battle with a knowing freeholder before they get their money. Obviously, if an informal lease extension offer is accepted they get their money very quickly with little work which is why few professionals point out all the problems I have in this blog.

Also, maybe five years ago this argument of ‘let someone else worry about the details’  may have been true, but it’s not a fair argument anymore.

More and more flat owners and solicitors are looking at the details of informal lease extensions and onerous terms inserted in the lease.

We see so many flat sales fall through now because someone has understood the implications of the informal lease extension offered.

Banks and building societies are also understanding the implications of onerous informal deals and the future effects these have on the value of flats.

In the big mortgage shake up of April 2014, the Council of Mortgage lenders brought in more stringent tests for people wishing to get a mortgage. This also included looking at the details of a flat sale.

In fact, the Halifax building society has already stated that they will take not grant a mortgage on any flat where the ground rent doubles every ten years. What about future legislation changes which could highlight these informals even more thus raising customer awareness to it?

Maybe the people buying your flat won’t understand the future implications of what you have signed up to in your informal deal with the freeholder, but is it really worth taking the chance to save a few hundred pounds in the short term?

How would it affect your future plans if you were stuck with a flat that you couldn’t sell?

Conclusion Why shouldn’t you accept an informal lease extension from your freeholder?

  • It will commit the flat to an additional £100,000 needless spend over the next couple of decades.
  • It means that this flat will have to spend a disproportionate amount to extend the lease in the future.
  • It would also cost a fortune for this flat to take part in a future freehold acquisition.
  • You will undoubtedly sign up your flat to lots of unsavory new lease terms.
  • You could massively damage the future resale value of your flat.
  • You could end up with a flat no one will buy.

The ‘Trojan horse offer’ of an informal lease extension really does contain lots of nasty details inside.

Details that can have very long term repercussions for this flat and whoever is unfortunate enough to own it. Most freeholders are professional freeholders and by and large they are not your friend. They own the freehold of your flat for one reason only and that it to make as much money as they possibly can.

You have no reason to ever trust them and I implore you to never trust them.

“Beware of freeholders, even those bearing gifts”

©Barcode1966 – 2015

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