Last year was the worst year to be a leaseholder in living memory, and the situation for the UK’s 4.1 million leasehold flat owners looks set to be even worse in 2017. That’s the view of Louie Burns, Managing Director of leasehold enfranchisement specialists, Leasehold Solutions.
A series of developments during 2016 has made it increasingly difficult for flat owners to exercise their legal rights, while the cost of doing so has also risen significantly.
Mr Burns said: “It is no exaggeration to say that 2016 was the worst year to be a leaseholder in recent times. From increasing the costs of seeking a resolution through the courts, to a seismic decision on how the value of leasehold extensions are calculated, to a new ruling that affects leaseholders’ right to manage their block, power has been steadily concentrated with already powerful freeholders, to the detriment of leaseholders.
“I’m afraid this trend looks set to continue during 2017, perpetuating the many injustices and inequalities of the UK’s feudal and outdated leasehold system.”
2016 saw the introduction of application fees for the First-tier Tribunal (Property Chamber); crucially, the new £100 application costs and £200 charge to attend a hearing are borne by the applicant. As the vast majority of applications are made by leaseholders against unreasonable freeholders, this extra financial burden will hit flat owners simply seeking to exercise their legal rights.
Burns explains: “The introduction of fees is very misguided as the extra cost will discourage leaseholders from applying to the court. This will leave some of the more unscrupulous freeholders at liberty to exploit leaseholders, particularly the poor and vulnerable who can’t afford the application fee.
“However, the situation could have been much worse, as the second part of the government’s plan was to include a flat fee of £2,000 per application, to be paid by the applicant. Luckily, working with the Association of Leasehold Enfranchisement Practitioners, we were able to explain how disastrous this would be for leaseholders and thankfully the government dropped its proposal.”
The ‘Mundy’ effect
In May the Upper Tribunal (Lands Chamber) handed down its landmark decision on leasehold relativity (Sloane Stanley Estate v. Mundy, 2016). In what may turn out to be one of the most significant decisions in the history of leasehold enfranchisement, the Upper Tribunal ruled against a new relativity graph proposed by Parthenia Valuation, which would have reduced the cost of lease extension for flat owners, in the event that their lease drops below 80 years.
Burns said: “As a result of the Upper Tribunal’s decision, leaseholders will now be forced to pay even more for their lease extensions. For example, the owner of 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; good news for already wealthy freeholders, but a very unfair result for cash-strapped leaseholders.”
Ground rent scandals
A series of high profile scandals hit the headlines during 2016; the first concerned informal lease extensions offered to flat owners at Blythe Court in Birmingham. The freeholder in question, Martin Paine, was exposed for selling informal lease extensions 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 was as high as £8,000 a year, making the flats virtually worthless. At a recent debate on leasehold in the House of Commons, Sir Peter Bottomley MP singled out Paine as “a crook who is turning sleaze in leases into an art form.”
House builder Taylor Wimpey was then cited in an article in The Guardian newspaper for selling ‘virtual freehold’ properties with 999-year leases. Onerous ground rent clauses attached to the lease, which mean that the ground rent doubles every 10 years from an initial £295 per year, have made the properties difficult to sell, as the ground rent due per year becomes disproportionately high and discourages potential purchasers.
Burns continued: “The ground rents involved may start small, but they grow exponentially over time. For example, we recently enabled a group of flat owners in Islington to buy the freehold of their newly-built apartment block. The ground rent clause was £250 a year, doubling every 25 years for 999 years. We calculated the ground rent due for the final 25 years of the lease per flat was set to reach £68,719,476,736,000!”
CONSOLS replaced with the NLF rate
In another complex development the government cancelled CONSOLS, an index used to value the premium due to a freeholder for the loss of any ground rent due to them as the result of a lease extension.
CONSOLS was replaced by the National Loan Fund (NLF), which is a daily spot rate calculated on the day the Notice of lease extension is served. At its introduction, the NLF rate was already considerably lower than the CONSOLS rate, and continues to fall in line with interest rate deflation.
Burns explains: “This has real financial implications for leaseholders – in a case we dealt with earlier this year, the amount due to the freeholder under the old CONSOLS rate would have been £4,000. This was calculated to be £12,000 at the time Notice was served in September 2015 – if we had served Notice today, the amount due would be closer to £20,000!”
Right to manage by block
The case of ‘Triplerose Ltd v Ninety Broomfield Road’ (2015) continues to have a serious effect on leaseholders’ right to manage.
Burns explains: “The new ruling means that a right to manage application must now be done on a block-by-block basis. For example, flat owners living in a development which contains four small blocks of flats all owned by the same freeholder 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 of the management of their own buildings; this decision provided freeholders with another powerful weapon to frustrate flat owners aspirations to manage their own block.”
So what does 2017 have in store for leaseholders?
“I hate to be the bearer of bad news but it looks likely that freeholders will try to push their advantages even further in 2017, using lower interest rates as a smoke screen to mask their aspirations to boost profits,” comments Burns.
“From late 2016 we were already seeing evidence that large freeholders were trying to argue for lower capitalisation rates, which are used to calculate the ground rent due to the freeholder, in order to drive up the lump sum payable to the freeholder when the lease is extended.”
An even bigger battle is brewing over the deferment rate, which is used to calculate the amount due to a freeholder to compensate them for the reversion of a property. The lower the rate, the more the leaseholder has to pay the freeholder; even a 1% reduction in the rate (from its current figure of 5%) would have huge financial consequences for leaseholders across the country.
Burns concluded: “There are plenty of battles ahead for leaseholders in 2017, and if our experience last year taught us one thing it is that freeholders will press their advantage to extract higher profits from lease extensions and ground rents wherever possible.
“The system of leasehold property ownership in use today is a relic of English property law dating back to Norman rule in the 11th century. It is time that this thousand-year-old feudal system was ended once and for all.”
Louie Burns, Managing Director of Leasehold Solutions