Freeholder's past alteration to lease

[jeffrey]

I understand the bit about HMLR, and in fact I know the new lease was created only five years ago. However, I am not clear how I could find out if a covenant/recital exists, or what is meant by the same "format". Does the mere fact that arrangements for the ground rent (ie. very different amount and different time-table for changes in ground-rent) imply a different format, or does it have to be much more.

One can purchase an official copy lease from HMLR, using hard-copy form OC2. It costs £24 usually.
As to consistency of format, sgclacy is right. A difference in ground rents is not uncommon and is not a significant difference for these purposes.

[James 2009]

Jeffrey

Something just occurred to me after reading your post - is there a reason why this could not be done...

Developer builds a small block and sells all but one flat on the open market, but sells final one to a related company at a punitive ground rent. If leaseholders ever wish to enfranchise they have huge obstacle in their path - the extra money they need to find to pay the part of the premium relating to the £10,000 pa ground rent.

If they can find the money developer can use that proportion of the premium they received for this huge ground rent to extend their lease at nil ground rent.

The downside is clearly missing out on the market value of the remaining flat at the outset, but it could be a useful tool if they wish to resist enfranchisement, and they can always re-write the lease to a normal ground rent if they wish to sell it in the future.

[jeffrey]

If they can find the money developer can use that proportion of the premium they received for this huge ground rent to extend their lease at nil ground rent.

Please clarify that bit. If the other lessees do fund an f/r purchase from the developer, it would be they who call the shots in setting a premium for the developer's associate to extend its lease and reduce the £10 000 ground rent to a peppercorn.

[James 2009]

Please clarify that bit. If the other lessees do fund an f/r purchase from the developer, it would be they who call the shots in setting a premium for the developer's associate to extend its lease and reduce the £10 000 ground rent to a peppercorn.

Sorry, I was not clear. What I meant was -

"If the other leaseholders can find the money to collectively enfranchise at the huge premium needed to reflect the punitive ground rent, then the developer can use that proportion of the premium they received to compensate them for the loss of this punitive round rent to exercise their rights to extend their lease at nil ground rent."

In other words the punitive ground rent does not do them any good or any harm when it comes to the collective enfranchisement happening - they win when the other leaseholders buy the freehold, but immediately lose when they have to extend the lease to rid themselves of the punitive ground rent. The only benefit to the freeholder is if they wish to put an obstacle in the path of leaseholders who wish to enfranchise.

[thevaliant]

Very Interesting (@ James)

The situation I imagine might be (made up example):
10 flats. 9 sold by developer for £100k for 99 year lease, £1 a year ground rent. No covenent to have same lease terms.
Last flat sold for £1 on 99 year lease, £A billion/squillion/trillion pounds a year ground rent, to Developer Limited (Owned by Developer). Of course, developer has no intention of collecting ground rent on any flat.

Developer then makes a complete shambles of running block, such that 10 years later, other 9 lessees get together to try to enfranchise.... only to find that LVT sets the cost of enfranchisement at that said same £billion/squillion/trillion pounds due to massive ground rent on the last flat.

Hence RTE is thwarted. Doesn't seem fair?

An extreme example, but surely not dissimilar to position OP finds themselves in now, with RTE costs higher than expected due to one lease not being on same terms. What is the solution therefore (or is it just 'live with it')?

[jeffrey]

Perhaps seek Declaration by LVT/Court that lease10 was invalid/fraudulent?

[sgclacy]

Assume 10 flats in a block and the freeholder owns one flat in the block and that flat is worth £200k on the open market and has a ground rent of say £100 per annum on a 999 year lease

To the outside world the landlords flat is worth £200k
To the RTE company its worth £1.5K (say 15YP)

If the freeholder changes the term of his lease before the RTE company purchaseand makes the ground rent £50,000 per annum on a 999 year lease

To the outside world this Flats value is £0k
To the RTE company they know the rent will not be paid so therefore the lease can be forfeited very soon and they will receive a flat worth £200k. So to the RTE company its worth getting on to £200K

So as the landlord increases the rent the value shifts from the outside world to the RTE, but at no time does this exercise increase the value above £200k, it slides between the two.

So if a landlord wishes to make the enfranchisement difficult he can do so only be lowering the value of his own interest in the block and therefore shifting the value on to the freehold. So on a lease extension he can offer a lessee a deal outside of the ACT and have a higher rent but he will be taking a less of a premium as a consequence. In other words as in this case the OP stated on page 1 the landlord took less of a premium than he could have done but in return gets a stream of income.

There is nothing wrong in a landlord taking less of a premium in return for a higher ground rent unless you believe it is fundamentally wrong for a landlord to invest in his own freehold?

It would not be in the freeholder interest to play this game for the following reason

A formal valuation would use a very very high discount rate to value this obscene rent to nothing as the discount rate used would need to reflect the fact there is no realistic chance of the rent being paid.

The future value of the reversion of £200k in 999 years is of course £0

So the landlord would have a flat with a ground rent of £50,000 pa which would have a £0 market value and would receive from the RTE company almost nothing on completion for this very high ground rent he has created.

His only hope would be to argue that the lease term would not last more than a few days as the flat would be abandoned and the reversion would come to the RTE company very soon. He might then persuade the LVT that the future value of the reversion is meaningful and get back most of the value he so nearly destroyed. I have no idea how the LVT would view such a bizarre case

[James 2009]

Assume 10 flats in a block and the freeholder owns one flat in the block and that flat is worth £200k on the open market and has a ground rent of say £100 per annum on a 999 year lease

To the outside world the landlords flat is worth £200k
To the RTE company its worth £1.5K (say 15YP)

If the freeholder changes the term of his lease before the RTE company purchaseand makes the ground rent £50,000 per annum on a 999 year lease

To the outside world this Flats value is £0k
To the RTE company they know the rent will not be paid so therefore the lease can be forfeited very soon and they will receive a flat worth £200k. So to the RTE company its worth getting on to £200K

So as the landlord increases the rent the value shifts from the outside world to the RTE, but at no time does this exercise increase the value above £200k, it slides between the two.

So if a landlord wishes to make the enfranchisement difficult he can do so only be lowering the value of his own interest in the block and therefore shifting the value on to the freehold. So on a lease extension he can offer a lessee a deal outside of the ACT and have a higher rent but he will be taking a less of a premium as a consequence. In other words as in this case the OP stated on page 1 the landlord took less of a premium than he could have done but in return gets a stream of income.

There is nothing wrong in a landlord taking less of a premium in return for a higher ground rent unless you believe it is fundamentally wrong for a landlord to invest in his own freehold?

It would not be in the freeholder interest to play this game for the following reason

A formal valuation would use a very very high discount rate to value this obscene rent to nothing as the discount rate used would need to reflect the fact there is no realistic chance of the rent being paid.

The future value of the reversion of £200k in 999 years is of course £0

So the landlord would have a flat with a ground rent of £50,000 pa which would have a £0 market value and would receive from the RTE company almost nothing on completion for this very high ground rent he has created.

His only hope would be to argue that the lease term would not last more than a few days as the flat would be abandoned and the reversion would come to the RTE company very soon. He might then persuade the LVT that the future value of the reversion is meaningful and get back most of the value he so nearly destroyed. I have no idea how the LVT would view such a bizarre case

In my example I had the ground rent at £10,000 - which in my head was a market rent on an AST.

If you assume that this is true, the freeholder wishes to retain the flat and that he wishes to receive a good rental income...

then by setting the ground rent at £10,000 and selling the lease to a related company at zero premium, then his freehold basically takes the value from the leasehold, and the leasehold interest is worth little, as the market rent equals the ground rent. However it could appeal to some leaseholders two believe that they will make a future profit as market rents rise, and the two companies are equally well off as they were before - between them they have a flat and a £10,000 income, just as they would if ground rent was zero. But leaseholders whould have to find the extra money up front to enfranchise.

the freeholder sells the lease to a related company for nothing

[jeffrey]

Q: would not that artifice expose company1 (F) to unnecessary tax payments?

[quarterday]

lease varied so as to impose doubling ground rents...

What the then freeholder did in imposing escalating ground rents was perfectly legal and proper given that the lessee accepted the terms. If the current owners of the flat did not realise what they were buying they really ought to make complaint to the solicitor who advised them at the time of their purchase. Clearly this is a much more onerous lease than one which reserves a fixed or nil ground rent and Specialist valuers can use arithmetic tables to devalue that future ground rent to todays' moneys worth, so as to arrive at a proportion of the cost of the freehold relating to buyin out the particular lessee's ground rent income stream. Ironically it is the lessee with the oppressive ground rent obligations who should be most keen to see the freehold acquired and all leases converted to, say, 999 years at a peppercorn.

[thevaliant]

Q: would not that artifice expose company1 (F) to unnecessary tax payments?

Probably would actually. F/R might not actually collect ground rent, but if HMRC found out about it, they would probably insist upon the transaction being posted.

So yes. That alone would probably stop any potential F/R trying the 'silly lease with high ground rent' trick.