barcode1966

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

The leasehold houses scandal and what you can do about it

Why are leasehold houses called a ‘scandal’?

imagesThere is no reason whatsoever why houses should be sold as leasehold, they should have been sold as freehold properties. Worse still is the fact that they have been sold with high ground rents that double every 10 years, 25 years or are linked to RPI (the retail Price Index)

The majority of leases pertaining to leasehold houses we have seen have also onerous fees that must be paid to the freeholder for licences and permissions included in the clauses of the lease.

Many of the tens of thousands of people who have bought leasehold houses from developers also feel that they were not correctly advised at the point of sale. I have spoken to hundreds of purchasers who tell the same story that at point of sale the salespeople working for the developers told purchasers that they would be able to buy their freeholds for a few thousand pounds once they had owned the property for the required two years. The vast majority however have found that their freeholds have been sold to large institutional ground rent investors without ever being consulted and these investors are now asking for £40,000 to sell them the freehold of their homes.

There is also huge anger from the purchasers that the solicitors they paid to advise them on the purchase of their houses did not advise them correctly about the implications of the ground rents and terms of the lease. Many contracts I have seen from the developers have directions that the solicitors the purchasers must use for the conveyancing should be “Nom Sol Only” i.e the solicitors named by the developers.

It really doesn’t smell right does it?

Why were the houses sold as leasehold in the first place?

Developers are saying it was just the ‘custom’ imagesin that area to sell houses as leasehold but that is simply not the truth.

Except for a few very rare circumstances there is no reason at all that a house should be sold as leasehold except to make the developer more money. Even in those rare cases where houses must be sold as leasehold due to restrictive covenants on the land, there is no reason to make the ground rent anything but a peppercorn and less reason to include onerous clauses in the lease.

If you look at the additional revenue it brings you can easily see why the developer is tempted. We have seen many house sold to ground rent investors for between £7,000 £16,000 per home or more. This additional income brought in many tens of millions of extra ‘profit’ for the developers.

For many of the developers to get this lovely extra ‘profit’ they have willingly sold their clients, the purchasers of their houses, into huge future debts from the ground rent they have to pay, the monstrously disproportionate fees to purchase their freeholds, regular fees for licences and permissions they require from their new freeholder and service charges etc.

A cursory scratch below the surface shows many of the directors of the house developers were also directors of many of these professional ground rent investors, the smell just gets worse! A cynic might come to the reasonable conclusion that if the leases were intended to have been sold to the home owners all along, why would developers include high ground rents and onerous clauses in the lease at all. Unless of course that the intention was always to sell to ground rent investors all along?

Although the developers have done nothing illegal in selling your houses to a third party professional ground rent investor, was it a moral thing to do? Is it a good way to treat a client of yours? Was this a fair thing to do?

I say categorically not!

Why do ground rent investors buy the freeholds?

For money and a lot of it too!

They make money from:

  • The ground rent you pay every year which is pure profit.
  • Charging you an admin fee to chase late ground rate payments.
  • The money they get when people want to buy their freeholds.
  • Any applicable sub-letting fees.
  • For the various licences and permissions, they can charge you.
  • Sometimes on building insurance.
  • Sometimes on service charges.

So, what are your options?

OPTION 1 – You may be able to sue your conveyancing solicitor for professional negligence.

img_5880.jpgAs you already know, it is not easy to sue a solicitor, after all they do this for a living. It is not enough to believe or feel that you were inadequately advised, it is all about how much proof you have.

Your first job is to get a copy of your file from the solicitor who advised you when you bought your house. You can do this yourself by simply writing to your solicitor or you could instruct a solicitor to do this for you.

Your solicitor has to provide you with this report but there is no legal timeframe for them to do this by.

What are you looking for in this file?

The most important document is something called your “Report on title’. This is the report on the pros and cons of you buying this property. A report on title can be two pages to 15 pages long.

This is the document that could give you the proof you need to sue your conveyancing solicitor.

The most important bit of your file to look for is the part where it explains the ground rent ground in your lease and the implications it will have for you in the future.

You will also need to check all the documents in your file too to see if any other documents your solicitor provided you in your report included advice on the ground rent of the lease.

What are your chances of suing?

This is very subjective and not meant to be used as an absolute guide to you chances of success of suing but it’s a fair guide.

If your file does not even mention your ground rent or their implications you could have a very good chance of suing.

If your file shows the solicitor simply states your ground rent is “£250 per annum” with no other advice you may still have a good case to win.

If it says “Ground rent is £250 and doubles every 10 years” but does not other any other advice you may still win but a solicitor will try to assert they did advise you.

If your file says “Ground rent is £250 doubling every 10 years and this could be bad” then your chances of success are reduced even further as the solicitor will insist they had properly advised you.

If it says “Ground rent is doubling every 10 years and might be bad so advise you get valuation on advice and advise on implications” then the solicitor has advised you about the ground rent and if you did not take a valuer’s advice then I’m doubt you would have any kind of case against them.

It is also worth carrying out the same process on the valuer you used to establish the market price for your home. Did they advise you on the onerous ground rent clauses? What does their file say?

Once you have looked at the pack, if you feel you have a case you will need to instruct a solicitor to sue them for professional negligence. There are many solicitors who would do this for you on a ‘no win, no fee’ basis. You need to ensure that the solicitor you choose should have a proven track record of successfully suing large solicitors for professional negligence and not just pick the cheapest or most eager to work for you.

Also keep in mind that the test for professional negligence is a two-part test.

  • The legal test – conveyancing solicitor had a duty of care which was breached causing loss.
  • Layman test – Had we been told we never would have bought the house (or would have negotiated better terms)

OPTION 2 – You can buy the freehold of your home

Broadly speaking there are three different ground rent schedules I have seen these leasehold houses.

  • Doubling ground rent every ten years. This is by far the worse one and is considered onerous.
  • Doubling every 25 years. This is not as bad and is not considered onerous.
  • Linked to RPI. This essentially means the ground rent you pay is linked to inflation and technically you pay the same amount each year forever more and this is also not onerous.

You need to keep in mind however that all these ground rent options are totally needless and exist for the sole purpose of creating an asset class for the ground rent investors.

Under the 1967 Leasehold Act you have a legal right to force your freeholder to sell you the freehold of your home if you have owned your home for more than two years.

Why should you bother?

The benefits are:

  • No more ground rent.
  • You now own your house and the ground it sits on.
  • No more sub-letting fees.
  • No more licences or permissions to pay.
  • No more dealings with your freeholder.

How much should it cost you to buy the freehold of my house?

How much it should cost is a three-part calculation2017-02-06-9-08-23-515-_93907167_katie-kendrick-1_5000x500 but only one of these calculations is applicable to most of you as you have long leases.

So, to work out how much it should cost we need to work out just one aspect of your lease. How much is the total ground rent you owe your freeholder for the remainder of your lease?

Many have ground rent doubling every 10 years for 5 multiples and remaining at that level for the remainder of your lease, these are by far the worse of the ground rent schedules.

If your ground rent is £295 on these terms the total ground rent you have been signed up for is 4.6m over 999 years. If it is a 250-year lease, then the total amount is ‘just’ a 1m!

Luckily for us, that is not the calculation because we are able to take into account the effect of inflation. As a pound today will be worth much less in 100 years from now.

The key point of this calculation is the percentage we use to do this calculation; it’s called the capitalisation rate. The higher the rate the better for the leaseholders, the lower the rate the better it is for your freeholder.

We have seen many valuations from people wishing to buy their freehold directly from their freeholder. In every one of these the freeholder is quoting a 5% capitalisation rate.

What does that mean in pounds and pence?

If your ground rent is £295 doubling every 10 years is around then the cost of buying your freehold is around £26,000 based on your freeholders 5% cap rate.

If you changed the capitalisation rate to 6% then the cost to purchase your freehold would be around £19,000. If it was 7% then you would be looking at around £11,000

For a house with a ground rent of £195 that doubles every 25 years or linked to RPI it would be £6,625 to buy your freehold based on a 5% cap rate. Around £4,500 for a 6% and £3,200 on a 7% cap rate.

So as you can see, the rate used makes a huge difference to you.

To put it in perspective the capitalisation rates we regularly agree in London are between 6-7% day in day out. Your freeholder is staking out an aggressive stance suggesting 5%. I passionately believe that if there were a group of you acting together you would win this battle.

So what is the process of buying your freehold?

  1. First you need to establish a fair price and work out if you can afford to do it.
  2. Instruct a solicitor to Serve a Section 9 Notice on your freeholder.
  3. You are not required to make an opening offer price.
  4. Freeholder can ask for a 3 x multiple of your current ground rent.
  5. You don’t need to put another offer price in the Notice.
  6. Freeholder has two months to respond but they don’t have to.
  7. Your valuer will start to negotiate with your freeholder on the cost.
  8. You can agree very quickly on the price if both agree.
  9. You have to make the final decision to accept the price on the table.

If your freeholder will not negotiate you will need to take them to the First tier Tribunal.

  1. It costs £100 to apply but can be done as a group.
  2. It costs £200 to attend but can also be split across a group.
  3. You will need a valuer and possibly a barrister to represent you.
  4. The court will decide on what is fair based on the evidence.
  5. The cap rate is the only point of contention.
  6. They may appeal.
  7. It is still worth it if you are a group.
  8. Your freeholder pays their own fees.

If possible you should do this at the same time with a group of your neighbours to make this battle affordable. Based on experience this Tribunal battle may cost you between 6-8k. An awful lot of money if you act alone. If you have a group however:

  • 10 people = £600-800 each
  • 20 people = £300-400 each
  • 30 people = £200-270 each
  • 40 people = £150 -200 each
  • 50 people = £120 -160 each

It sounds like a real pain and it is but it is better than handing £40,000 to your freeholder for your freehold as you could save many tens of thousands of pounds!

Surely, the best thing to do is to approach your freeholder directly and negotiate with them?

I see that a lot of people are doing this. It could be possibly the worse thing to do though, it would be like getting foxes to babysit your chickens and hoping the all play nicely.

Your freeholder has bought your freehold for one reason and one reason alone, to make as much money from you as they possibly can. Do you really think they are going to negotiate fairly with you and give you a good price?

Why would they?

It is also very very important to know that if you try to buy your freehold ‘informally’ for your freeholder you step outside any legal protection you would have if you acted inside the ’67 Act’. Your freeholder can negotiate the very best deal for themselves on the freehold transfer and there is nothing you can do to remove anything from the contract you don’t like, it’s a take it or leave it deal.

For example, we have seen many clauses in the lease where a leasehold house owner is required to pay £300 per room to their freeholder for ‘permission’ to fit a new carpet or bigger costs for permission to carry out alterations to your home. On many informal freehold purchases we have seen that are done directly with the freeholder we see them keeping these fees for the permissions in the transfer.

So you will over pay to the freeholder on their value and find that after you will still need to pay fees for permission to change a carpet etc! Don’t do it!

OPTION 3 – Buy your freehold as part of a group using your statutory legal right under the 1967 Act. 

The very best thing you can do is to buy your freehold as part of a group with your neighbours acting at the same time, the bigger the group the more money you will save. There is an economy of scale when you act as a group but it will also give you formidable  negotiating power against your freeholder when trying to agree a fair price.

How do you choose which Solicitor and valuer to use?

It is tempting to choose the cheapest ones based on quotes you get from the various professionals but with the leasehold world cheap is not always the best option for you, you will only have one chance to get this right and you don’t want to end up in an even worse situation after you complete on the purchase of your freehold because you chose the wrong valuer or solicitor.

I strongly suggest that you choose a solicitor or valuer who are members of ALEP as all of these have had to prove they have the expertise to work for you in freehold purchases and are generally the best in the industry at what they do.

How acting as part of a group is the best way through this.

It will save you money on:

  • The valuation fees involved.
  • The solicitor’s fees involved.
  • The actual price you pay for your freehold.
  • Sharing any Tribunal fees.

This is the only way you will end up paying a fair amount for your freehold.

fullsizeoutput_5d1Through no fault of your own you have found yourselves trapped in the spiders web of leasehold where very clever groups of people now have a financial interest in your homes and see you as a nothing more than a ‘revenue stream’ for them and their investors.

This is very clearly a very morally bankrupt situation and it has caused many thousands of people who bought these house untold stress and heart ache. However, your developers have done nothing illegal in selling your freeholds and the ground rent investors have done nothing illegal in buying them. This is the awful world of leasehold!

You will need to skilfully use the law to free yourselves from the grasp of these faceless investors and take control of the financial destiny for yourselves and your family.

It is therefore essential that you don’t rush into the wrong route to rectify this or choose the wrong professional to help you to do it. Do your research well, take your time, question everything, trust no-one and make sure you fully understand your options before you act.

I hope this article has helped you a little and I wish you all the very best of luck.

©Barcode1966 – 2017

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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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