barcode1966

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

The forgotten casualties of the doubling ground rent scandal

fullsizeoutput_730It has been immensely gratifying over the last few months to see the focus firmly remain on the leasehold house scandal where many of the largest developers needlessly sold houses as leasehold.

To make matters worse they embedded excessively high ground rents with accelerating clauses which see them double every 10 years or are linked to RPI. They also inexplicably buried clauses in the leases which allowed the new freeholders to demand huge sums of money for licences and permissions to be paid to them by the unsuspecting leaseholders.

This has left tens of thousands of people in seriously financially disadvantaged positions which has caused them severe stress and upset all caused by major developers who they trusted, a real scandal.

Through the indefatigable efforts of The Leasehold Knowledge Partnership and the National Leasehold Campaign Facebook page, the continued focus on this needless scandal has started to bring real change.

There have already been statements from the Housing Minister, the Prime Minister and even in this years’ Queen’s speech all promising to end the leasehold abuses.

It has also seen Taylor Wimpey offer 130 million pounds to try to ‘rectify’ the doubling ground rent scandal. On top of that Nationwide Building Society have now altered their lending criteria on leasehold properties with many other lenders confirming that they are reviewing their current criteria too.

Arguably though, the biggest benefit achieved so far has been to raise the issues of ground rents in the consciousness of the nation.

The biggest ground rent scandal

There is however a bigger scandal on a much greater scale that involves doubling ground rents which is waiting to be uncovered. This scandal has already affected hundreds of thousands of people. This scandal is receiving virtually no media nor political focus and many leaseholders are completely unaware of the trap they are blindly falling into.

I am referring to informal lease extensions undertaken for leasehold flats.

What are informal lease extensions and what are the real issues surrounding them?

If you need to extend your lease you have a legal right to extend your lease by an additional 90 years and importantly your ground rent is reduced to zero.

Once completed this strips out any future income from ground rents and lease extensions for the freeholder and they really don’t want this to happen.

Avaricious freeholders and their oily legal advisors put in a huge amount of effort to prevent leaseholders using their legal rights to extend by constructing ‘Machiavellian’ informal offers which are quick, easy and seem to save you money but the very opposite is true.

How do freeholders push their informal lease extensions onto you?

fullsizeoutput_72d.jpegIf a leaseholder decides that they need a lease extension they will generally contact a solicitor or valuer to ask their advice. The majority of these professionals will recommend contacting the freeholder directly in the first instance to ask them how much they want for the extension. They will claim to be ‘experts’ in negotiating directly with freeholders and point out it could save you time and money.

Even if you don’t contact your freeholder directly, you will often find you receive an informal deal from your freeholder once you have Served the legal Notice to extend. Many freeholders have a process of refusing to negotiate on a legal lease extension and promise to be difficult throughout whilst presenting their informal offer which they will complete on cheaply and easily.

Once the ‘deal’ arrives from the freeholder these professionals acting for you will often intimate, with heavy caveats of course, that it is a good deal for you. If it’s a bad deal but you’re extending because you wish to sell the flat, they will often advise you to let the person who buys from you ‘deal with the consequences, why should you worry?’

These deals will usually offer to extend your lease back up to only 99 or 125 years. For example if the lease on your flat had fallen to 80 years it would only be topped up by 19 years to 99 years as opposed to having a lease length of 170 years through the statutory route)

Instead of reducing your ground rent to zero they will include new onerous ground rents which can be between £250 – £500 per year. Their coup de grâce will be to link this onerous ground rent to an aggressive accelerator, like ground rent doubling every 5 or 10 years.

This is evil genius by freeholders because not only will they make a fortune from the actual ground rent they will now collect, they know that in another 15 years or so someone will have to extend the lease again and with ground rent that high they will have to pay many tens of thousands of pounds for the extension.

They have turned a one off lease extension which may have earned them a few thousand pounds into a valuable asset which could easily earn them at least £60,000 to £70,000 over 15 years.

If you would like a full explanation of why informal lease extensions are so damaging, please click here.

What does this mean for the flat owner?

fullsizeoutput_734A leaseholder who tried to rectify their lease length and accepted one of these informal lease extensions has sold themselves into huge debt to save just a few hundred pounds on the cost of a statutory lease extension.

At best it will strip any equity that they may have built up over the years in their flat and at worse it will leave them with an unsellable flat.

If you have accepted a ‘quick and cheap’ informal deal to enable you to sell your flat, you may now find a much more cogent buyer refuses to buy your flat or they may offer a much lower price for it to take into account the dreadful deal you have signed your flat up to.

Potentially buyers will now also find it much more difficult to secure a mortgage on a flat with onerous ground rent terms as lenders tighten up their lending criteria. This could leave you with a flat that is unsellable.

There is no doubt that due to this increased focus on ground rents from buyers and lenders real care should be taken before you decide to agree to accept an informal offer.

How can informal lease extensions still be legal?

What is so astounding is the fact that these informal lease extensions are allowed to happen in their thousands every year to unsuspecting flat owners.

In a world that offers so much consumer protection, how can greedy freeholders be allowed to trick people with complex compounding financial deals that ruin lives?

How can it be illegal to sign someone up to a £10 a month mobile phone contact without spelling out every single aspect of the deal first but it is legal to trick someone into a complex deal which could cost them £50,000 with no legal recourse?

How can informal lease extensions be unregulated still?

What is the best way to keep free from the effects of these informal deals?

  • Don’t ever consider accepting an informal lease extension offer.
  • Insist that the ground rent is reduced to zero (thus stripping out any future value)
  • If you are buying a flat, ask if the lease has ever been extended.
  • If the lease has not had 90 years added or if there is still ground rent, it’s an informal.
  • If it has demand to see the ground rent and when it increases.
  • Consider carefully the real implications of the deal before buying.

This can only be answered by Government, the DCLG and LEASE who are all totally silent on this scandal.

The next leasehold ground rent scandal

fullsizeoutput_732There is no doubt that this informal lease extension scandal will soon be uncovered and written about and the scale of this scandal will be staggering. I estimate that between 40-50% of all lease extensions carried out each year are informal and this has been going on for 25 years!

When flat owners come together and realise what they have been tricked into signing by amoral freeholders and their solicitors a scandal of breathtaking proportions will be revealed and it will dwarf the current leasehold houses scandal.

There will be tens of thousands of flats that will be unsellable and thousands of normal hard working people will see that they have been tricked into giving the financial provisions they have made for their future over to greedy millionaire freeholders.

It is time for the government, trade bodies and the media to step in and rescue the forgotten casualties of the doubling ground rent scandal.

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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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