barcode1966

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

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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Why the threat of compulsory purchase orders has become one of the biggest fears for ex-local authority leaseholders in London.

418865_406280396101674_377969546_nCompulsory Purchases Orders (CPOs) are already a big issue in London, with many estates having already been forcibly bought. I am currently aware of 37 different estates in London that are currently fighting CPOs and it is just about to get much worse.

The current political thinking about CPOs in London

That’s because the political thinking around CPOs has shifted dramatically and swiftly during 2016. In this year’s London electoral race both Zac Goldsmith and the winning Sadiq Khan agreed that CPO’d council estates should be the land used to facilitate the building of the 50,000 new homes that were promised to be built per year in the capital.

In early 2016, the Prime Minister announced that he was about to blitz poverty by demolishing at least 100 large, run-down and difficult to manage council estates. He described these as ‘sink estates’ and to show how serious he was he pledged 149 million to it. Obviously 1.49m per estate is a paltry figure and so the government will need to rely heavily on developers’ money to pull it off.

Cameron then commissioned the silver-spooned Michael Heseltine (who ironically was a key figure in Thatcher’s original sale of council houses under the right to buy legislation) to examine how to demolish and redevelop the country’s 100 worst “sink estates” with the help of the private sector.

Heseltine says it is his dream to get rid of the ‘slums’, which is about to become a real nightmare for the legitimate tenants and owners of these properties. One thing Heseltine’s 17-person regeneration panel aims to do is speed up the process by fast-tracking developers’ applications.

Last March a body called the London Land Commission, headed by Boris Johnson, was formed to compile and publish a register of all publically owned land and property in London in preparation for this great compulsory plan.

Bizarrely a left wing think tank, the IPPR, have been embraced into this ‘social cleansing club’ and now seem to be at the forefront of current political thinking, having produced their own damaging report entitled City Villages: More homes, better communities.’ Here they assert that ‘by far the largest source of publicly owned land suitable for new housing is already owned by local authorities in their existing council housing estates.’

Following this all council estates have now been classified as ‘Brownfield estates’ and are now viable targets for CPOs, social regeneration and fat profits to be made.

This job of carving London up seems to have fallen to the estate agent Savills. They also produced a 164 report with the snappy title Completing London’s Streets: How the regeneration and intensification of housing estates could increase London’s supply of homes and benefit residents. In  their darkly disingenuous report, the estate agents spell out their vision of redeveloping existing council estates and the benefit it will bring to London (read: their friends, the developers); they also gleefully assert that they should be paid huge chunks of tax payers’ money to preside over it all, as the various councils don’t have the expertise.

I could go on and on but the upshot is that all council estates have now become valid and viable targets for CPOs and all politicians, potential mayors and the private sector are in agreement.

Why do councils want to issue CPOs?yuppie2

The official reason is to turn run-down estates into sparkling new homes for their social tenants and leaseholders.

The real reason though is mostly about money. Firstly, they get money from the eager developer who wants to mow down the flats and build nice shiny chrome and glass luxury flats to a mostly investor market.

They get out of having to pay for and provide thousands of homes for social tenants, who in CPOs get ‘decanted’ out of the area, sometimes being shipped as far away as up north.

In their eyes the area will become more desirable to live in once it’s been socially cleansed and they can then put your council tax up.

Finally, many councils signed up to LOBO loans and they need to pay them off.

A sad pattern that is emerging from all these regeneration schemes is that they are sold initially on the amount of social housing that will be included in these developments. It soon transpires that there isn’t enough profit for developers to include the social housing element they promised after all and it’s reduced to a minuscule amount of housing.

What are the biggest dangers to you if your flat is CPOed?

The number one danger is the amount of money they will offer you for your flat compared to what it is actually worth on the open market.

The councils have a legal obligation to ensure that a flat owner is in ‘a no better or worse financial situation’ after a CPO. The reality though is different and very grim.

Councils tend to make their first offer of compensation a derisibly low offer to start with to shock flat owners and set their expectations and then over a period of many months they incrementally increase the offer whilst doing a good job of managing everyone’s expectations.

Below are some very rough figures I have been given (I have not been able to check the validity of all of them all. I have heard the same figures time and time again however so they will be pretty accurate)

  • Hendon (worth £347,000), opening offer £130,000, final offer £214,000
  • Heygate (worth £355,000), opening offer £114,000,  final offer £164,000
  • Colville (worth £270,000), opening offer £120,000, final offer £150,000
  • Woodberry (worth £330,000), opening offer £130,000, final offer £158,000

Data obtained by campaigners at the Aylesbury estate under the Freedom of Information Act found Southwark council paid £147,500 for a four-bedroom, 97 sq m maisonette. The average house price in London at the time had just had hit £400,000.

At the West Hendon estate in Barnet, some leaseholders were offered just £90,000 for a one-bed flat and £130,000 for a two-bed maisonette when the council applied for the first in a series of compulsory purchase orders.

This is hugely unfair to flat owners who are not being given a fair market price for their flats and they cannot buy a like to like flat on the new development.

There is then a real human cost to receiving unfair compensation. Many leaseholders will be too old to get a mortgage and will not be given enough compensation to buy another flat in the area they have grown up in. They will be faced with either using their capital for rent until it is used up or moving hundreds of miles away to be able to buy cheaper properties.

Those young enough to get a mortgage will be in a similar positon of not being able to afford to live in the area they currently do – with their friends and extended families – and will instead be forced to move to cheaper areas. This causes real issues for families forced to break up, and it is widely documented that people in these situations are suffering from depression or mental health issues due to losing the support of their friends and families.

Of course if leaseholders are unhappy with the valuation offered they can take their case to the Upper Tribunal but the cost of valuers, solicitors and barristers is very daunting to leaseholders. Also the councils, who get all their fees paid for by the tax payer, are almost certain to appeal if they don’t get the desired decision, thus wiping out a huge portion of the compensation received by a leaseholder, win or lose.

Will buying your freehold prevent a CPO from happening?

34836_chopsticksbeforePossibly. A council can make a CPO on any property as long as it is can be proved to be in ‘the public’s interest’. In reality though, it is generally much easier for a council to make a CPO on property they broadly own than to do it on property that is completely privately owned.

The more buildings that have the freehold purchased the harder it will become to make these sweeping CPOs.

There is also the scope for a much higher valuation for flats with a share of freehold of between 1-3% which on some high value flats will start to make a big impact on compensation.

There is a further argument that was successful and became case law in CPOs.

Transport for London v Spirerose Limited.

Spirerose successfully argued a form of “hope value” on the future development value on the freehold of the building that they owned. This adds a further layer to possible compensation if a building has been bought from the council.

Councils will not like the fact that bulk lease extensions and freehold purchases are being done on these estates as it will be driving up the compensation they will have to pay out if they try to serve a CPO.

What can you do to stop a CPO?

Anyone can submit a freedom of information request to a council to see if your block is being considered as a possible CPO target. There can be lots of rumours around the fact but it is simple to find out the truth.1441360468

If you are targeted for a CPO don’t despair! The council have to jump through a lot of hoops to get the permission required to take possession of your homes.

Organise yourself into a group with your neighbours who will be affected. The best possible chance you have is to act as a group to fight the proposal. Connect your group with those social tenants at your block who will also be looking to object; although you will both have different issues you have the same goal and it is a mistake to act separately.

Look at what other estates have done to fight CPOs, as there is a lot of information out there.

Write to MPs to let them know the human cost of CPOs.

Just recently the Aylesbury estate has won a famous victory to prevent a CPO taking place but we need to watch closely what happens next.

Some useful links

The official stance on CPOs

Some key case law

Another tower of shame (35 percent)

Heygate sell off (35 percent)

Heygate Estate Southwark Notes

©Barcode1966 – 2016

 

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