New Government proposals re leasehold reform

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  • sgclacy
    replied
    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

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  • Lawcruncher
    replied
    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.

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  • sgclacy
    replied
    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

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  • AndrewDod
    replied
    Originally posted by Lawcruncher View Post
    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.

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  • Lawcruncher
    replied
    Originally posted by sgclacy View Post
    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.

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  • AndrewDod
    replied
    Originally posted by sgclacy View Post
    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.

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


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  • Codger
    replied
    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.

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  • sgclacy
    replied
    Originally posted by Lawcruncher View Post

    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.
    .
    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

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  • Sussex818
    replied
    The proposition is that all new lease extensions will be 990 years after reform and there will also be a standardized calculator to work out the cost of a lease extension which will make it much simpler and hopefully swerve the huge legal bills which leaseholders have to pay for a statuatory lease extension.

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  • SouthernDave
    replied
    Originally posted by eagle2 View Post

    I would like to see all leaseholds on 999 year leases, standardised fair terms for all leases, peppercorn ground rents, leases presented to leaseholders at the outset, a cooling off period, all management under the control of a leaseholder owned company, strict control over service charge monies and severe penalties for those who misuse those monies, a fair and simplified system of dealing with disputes with no access to the service charge monies for that purpose, costs to be determined if one party acts unreasonably,
    Sir, where can i vote for you in the next election?

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  • Lawcruncher
    replied
    As to the first paragraph of post 12: I agree. If I were still doing conveyancing I would prepare a no-holds-barred information sheet for clients proposing to buy leasehold property.

    As to the second paragraph: It is indeed true that on the grant of a new lease in a development the draft lease is presented on a take-it-or-leave-it basis. That has to be the case as all leases need to be the same. On an assignment of any lease you are fixed with the terms unless the landlord can be persuaded to change them. It is though not the case that the lease terms are presented at the eleventh hour. The draft lease is supplied at the beginning of the conveyancing process and therefore before contracts are exchanged. There can be no possibility of a deposit being retained.

    As to the third paragraph: I do not agree with the idea of a cooling off period when a party is legally represented. Otherwise I agree with the thrust.though I would go further and simply make commonhold compulsory. That does though leave the question of what happens to all existing long leases. I say automatic conversion to commonhold with no compensation.

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  • eagle2
    replied
    What is happening in practice is that freeholders are striking deals with builders at an early stage, often before any building work commences, they are preparing the lease and agreeing to purchase the freehold from the builders after all the apartments have been completed. Yes leaseholders should be warned about the risks of purchasing leasehold property but that should take place at the outset before any costs have been incurred and before any contracts have been signed.

    The leaseholder has absolutely no say in changing the terms of a lease. It is usually presented at the 11th hour on the basis that it is a standard lease for the entire block and it cannot be altered. The leaseholder is then threatened that completion must take place often in a matter of days, otherwise the deposit will be forfeited or penalties for late completion will be imposed. There is no cooling off period. A leaseholder is already under duress dealing with everything involved in moving home.

    I would like to see all leaseholds on 999 year leases, standardised fair terms for all leases, peppercorn ground rents, leases presented to leaseholders at the outset, a cooling off period, all management under the control of a leaseholder owned company, strict control over service charge monies and severe penalties for those who misuse those monies, a fair and simplified system of dealing with disputes with no access to the service charge monies for that purpose, costs to be determined if one party acts unreasonably,

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  • Lawcruncher
    replied
    Originally posted by AndrewDod View Post
    I can't really agree with this perspective etc
    I half agree with you. Where I differ is with respect to retrospective change. I am all in favour of people keeping to bargains they have struck. However, the principle is not absolute. So long as the other party has full capacity, a party should be able to drive a hard bargain, but not an unfair one. As Lady Hale put it in the bank charges case, you should be allowed to make an unwise bargain but not an uninformed one.

    The problem with long leases is that many clients are not informed. Few clients get past page 1 of a 10 page lease let alone a 70 page one. If they do they will not take most of it in. The conveyancer's job has to be to read the lease and draw the client's attention to the salient points. Even then, the letter is going to be long and the client may only skim it. Buying property is a stressful time and the client will have other more practical things on his mind like arranging the removal van. The client trusts the conveyancer to make sure he has no problems. Many conveyancers are letting their clients down by allowing unreasonable conditions. When I was working I would sometimes be amazed that a property could pass through several hands when the lease contained some serious defects or unacceptable provisions. Years on this forum has confirmed my opinion that many buyers of leasehold properties are not properly advised.

    Leases are now being drawn up to make a nice little earner for the landlord or provide an extra asset someone will be more than happy to buy. 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.

    The position has now got totally out of control: A significant proportion of property owners not only effectively have to buy their properties twice but are getting ripped off. We have almost got to the stage where, even if the lease is well drafted and fair, conveyancers are negligent if they do not strongly advise against buying leasehold properties.

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  • JK0
    replied
    Originally posted by NaomiB View Post

    Well yes, we've got the non transparency, reserve fund misappropriation but how can freeholders prevent sales of leases? You've got me worried now!
    If a freeholder has been charging exorbitant 'consent to let' fees, but the lessee has refused to pay them, they can be demanded again with interest when the lessee wants to sell. Pending payment the freeholder simply refuses to process any sale papers.

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