New Government proposals re leasehold reform

[sgclacy]

Any suggestion that the ground rent is all part of the bargain does not wash because people do not see it like that if they see it at all. The only reason flats are sold on long leases is because of the difficulty of enforcing positive covenants without a lease.
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If a draft lease is presented to the proposed grantee and there is an initial rent of say £350 per annum then I fail to see why, notwithstanding that it is greater than 0.1% that this should be interfered with, Neither should clauses that seek to keep its purchasing power the same during the term be abolished. A lessee is represented by a solicitor and a surveyor in the purchase and the sale takes some months to go through. Otherwise, there is a danger of undermining all contracts. The lessee covenants to pay the rent, and others have relied on that promise, and that in our society needs to be recognized. Otherwise, there will be a challenge in the European Court of Human rights.

In any event, ground rents 100 years ago were far from peppercorn sums. It is only the ravaging inflation of the 1970s which reduced many rents to token sums

Further, is a ground rent of £350 per annum on say a flat worth £250k the stuff of nightmares ? The depreciation on a large flat screen TV can be that in a matter of a few months, or on a new laptop ?

If we do cap ground rents then the next argument will be that the grantee did not appreciate that 99 years means 99 years and that the lease term should be made 999 years instead and if that argument succeeds then the next wave of attack will be that the grantee did really appreciate the premium he was paying and because a flat was the only option available they had no choice but to sign up. The premium it would be argued to be reduced to the cost price of the flat to the developer, as any profit the developer makes will be seen as exploitation, and so it goes on.

What I do think is that the granting going forward of an informal lease extension which allows the existing ground rent to prevail during the original term remaining should be valued so that the lessee understands the financial burden the ground rent imposes on the property and can evaluate whether the terms of an informal lease extension is reasonable compared to a statutory one. The NPV of the rent to be shown next to the proposed premium, with the discount rate used set by the government. It is a simple thing to do and would avoid the problems of the 10-year doublers

[Codger]

Continuing chipping away at btl landlords sec21 rights are a massive retrospective change to contracts. Why should freeholders expect better treatment?
There are fewer of them in the lords now.

[sgclacy]

The changes to section 21 rights impinge on the management of BTL investments and does not effect rental streams or underlying capital values

[AndrewDod]

The changes to section 21 rights impinge on the management of BTL investments and does not effect rental streams or underlying capital values

Agree with your earlier posts, but this is definitely not right (or would only be right when BTL properties for a negligible part of the property stock). The effects may not be at exactly the same time though.

[Lawcruncher]

If etc

The points you make are all very well. They do though fail to take into account that many prospective purchasers are not properly advised and, even if they are, fail to take on board the full implications of what they are told. Being told the ground rent on a £250000 purchase is £350 pa is one thing. Having it pointed out that the total consideration is £284650 (and it will be a lot higher if inflation is added in and higher still if the ground rent doubles) is quite another and likely to make a buyer stop and think.

If you buy a freehold property, a car, a boat or a gold watch you do not expect to keep on paying a percentage of the price or, after a fixed period, to have to return the property or pay more money to keep it. It should not be different if you buy a property which happens to have another property above or below it. There is no justification for charging rent.

And if we are talking about a landlord being entitled to preserve the value of his asset, what is the justification for the tenant being required to pay fees for the landlord to carry out his obligations when tenants are never allowed to charge landlords? Indeed, we can go further and ask, if it is the case, as some insist, that the tenant owns nothing and everything belongs to the landlord, what the justification is for the tenants paying to maintain the building.

As to human rights, many years ago the Duke of Westminster challenged the right to enfranchise under the Leasehold Reform Act 1967 and lost in the European Court of Human Rights. I cannot see the ECHR having a lot of sympathy with landlords when (as far as I know) all European countries allow absolute ownership of strata property.

[AndrewDod]

If you buy a freehold property, a car, a boat or a gold watch you do not expect to keep on paying a percentage of the price or, after a fixed period, to have to return the property or pay more money to keep it. It should not be different if you buy a property which happens to have another property above or below it.

The "justification" is that it is a contract.

The £284650 total consideration is completely irrelevant
-- £284650 will only be worth a few thousand pounds 200 years from now. I will likely pay £500,000 for my broadband (or equivalent) over the next 200 years.
-- The individual can always sell their lease to someone else

Surely in any contract the key elements to look at before anything else is a) The duration and b) the price.

If a party to a contract doesn't even look at and check for reasonableness (why is a 0.1% rent unreasonable - even if that were relevant) where does it end. I have come across two individuals who were seriously (apparently) puzzled that they had to pay service charges even though the property they purchased was "share of freehold" -- should they also be exempted via some retrospective government edict.

Of course ground rents do serve some purpose, and they also set a price on the original transfer of the lease (if the cost were lower the lease would cost more to purchase - on average) - most ground rents are pretty nominal, and FHs do need them to cover items not included within the lease (which are many).

I have no particular axe to grind for freeholders (generally hating them, and not being one) nor really for the principle of the way the system works -- but this really is a distraction. Things are bought and sold and priced under a set of principles -- whether a pension, life insurance, a mortgage. We don't suddenly decide in retrospect that someone who does not bother TO PAY to insure their home against flooding, should have everyone else who is less cavalier pay for their loss.

[sgclacy]

It is the financial burden that the ground rent imposes on the property that needs to be valued correctly.

The consumer credit act sought to value one financial product with another, by having the APR quoted to assist the purchaser make an informed choice. My proposal would be that the value of future ground rents are discounted using a defined discount rate set by the government, so the value of the financial burden is clearly understood BEFORE entering into the contract, so the purchaser knows that the total cost of buying a leasehold property is the sum of the premium PLUS the Net Present Value of the ground rent

So if two identical properties are offered on new 125 year leases

The first with a premium of £250,000 and a ground rent of £350 doubling every 25 years and the second with a premium of £250,000 with a ground rent of £100 doubling every 10 years the figures for each assuming a discount rate of 5.5% would be

The first would be £250,000 plus an NPV of the rent being £9,481 a total of £259,481

The second would be £250,000 plus an NPV of the rent being £27,709 total of £277,709

So whilst the second may appear an attractive offer with the much lower ground rent, it is of course more expensive in the long run. This jumps off the page when the NPV of the rent is disclosed, giving the purchaser the opportunity to negotiate and understand the terms before committing to the lease

With an online calculator, it would be quite simple to obligate developers and sellers to quote the NPV of the rent when selling the property - all to be shown in Box LR7 of the prescribed clause of the lease next to the premium

[Lawcruncher]

A lease is the grant of an estate in land. The estate granted is a "term of years", a label which describes what is in the tin. Virtually all leases have conditions attached or implied, but the conditions are not essential. A lease may for convenience be regarded as the combined grant of a term of years and a contract and in practice the contractual element is very important. However, even if it were the case that a lease is no more than a contract I do not see what relevance it has to how the consideration is paid.

I have stressed above that most long leaseholders are not made properly aware of what they have let themselves in for. It is also rather disingenuous to suggest they have a choice. It suggests that all long leases can be negotiated when they are offered on a take it or leave it basis. We have reached the position where terms which 50 years ago would have been considered unacceptable are presented as standard. This is in no small measure due to the supine attitude of the conveyancing profession when acting for prospective tenants.

As a general principle, I am in favour of any party being bound by an agreement when he was legally represented. But this issue is bigger than any individual case. People are being ripped off.

[sgclacy]

As I said earlier if a property is burdened with a ground rent of £300 - £500 per annum and it rises by the RPI or doubles every 20//25 or 33 years how is that the stuff of nightmares ?

We are regarded in a world stage to have a very advanced legal system and as seen as a safe place to do business. The idea that agreements where the lessee is represented by a firm of solicitors over a period of time should be rewritten because the lessee had no choice but to sign up or their professional advisors did not do there job properly is not acceptable - the next argument will be that the lessee thought 99 years was another word forever and that the lease should be varied to 999 years at no cost to address that problem- they had no option but to accept 99 years otherwise they would miss the chance to become homeowners

The burden of a ground rent has risen because of the collapse in interest rates and it is indeed the case that lease extensions have cost more as a consequence - but that collapse in interest rates also delivered an increase in house prices and an increase in defined benefits pension schemes . Those two benefits outstripping any increase in the cost of a lease extension

Consider a lease extension - in an informal lease extension all that is up for discussion is the premium the term and the ground rent as its review pattern - the lessee will be represented by a solicitor and invariably there will be a surveyor advising - the landlord will also be represented by a solicitor and often a surveyor - a deal is then agreed and may we’ll contain a higher ground rent for a lower premium - how can be be equitable for the government to then alter the terms of the ground rent on the basis that others signed up to leases as they had no choice and it was all written in legal speak and the solicitor didn’t give proper advice - the more you ponder on the subject the more absurd it becomes to interfere with terms unless that are outrageously unfair