My suggestions for the Leasehold Consultation.
In my view leasehold is an unfair, unjust and anachronous system used by freeholders to make themselves rich at the expense of leaseholders by using the current flawed legislation. It is a feudal system which we should be consigned to the history books once and for all.
Ban leasehold as a legal land tenure
Britain and Wales are almost unique in the world for having an outdated leasehold system which accounts for around 20% of the total housing stock. It is an iniquitous and outdated system and it should be banned and all leasehold stock should be moved to a commonhold system for flats and enfranchisement for houses with a simple prescribed statutory valuation method to calculate the cost for the leaseholder. This would bring our land tenure system into the 21st century and put us on par with the rest of the world.
I do, however, understand there are serious legal issues that would need to be overcome to make this a reality. Contractual law and valuation are two areas where considerable payments would be due to the compulsory nature of this proposal which would make this approach potentially difficult and open to serious litigation.
Therefore, if this is not a possibility, my other suggestions below would bring the eventual end of the leasehold tenure system.
Ban the sale of all houses as leasehold
There is no need for houses to be sold as leasehold save to create an asset class except in cases where there are existing restrictive covenants on the land. The sales of houses as leasehold should be banned immediately.
Where there are existing restrictive covenants on land the lease should be granted for the longest possible term allowed by the restrictive covenants, with no nasty terms inserted in the lease, and ground rent should be a peppercorn.
Make it mandatory that all new leasehold flats should be Commonhold as soon as possible. The current legislation would require some redrafting first but once done, commonhold should be compulsory.
This would act as a ‘sunset clause’ on leasehold and draw a line under leasehold as a land tenure once and for all. Over a period of time the market itself would get rid of the awful leasehold tenure.
Introduce a mandatory leasehold information sheet
Whatever changes are made to legislation, a quick win, and one that will go a huge way to eradicate unfair practices in leasehold, would be for the Government to bring in a mandatory ‘leasehold information form’ for the sale of each leasehold property. This form should be simple, comprehensive and easy to read.
It should include clear information on what the current ground rent is, how often the ground rent accelerates, what fees exist for licences and permissions, how much the service charge per year is and whether there are any major works planned in the next three years.
This form would ensure that leaseholders are properly informed of the terms of the leasehold property they are purchasing thus ensuring they are properly advised before they purchase. It would also massively raise awareness with buyers on the pitfalls of leasehold properties. If a buyer was subsequently misinformed by their conveyancing solicitor, they would have a clear route to litigate against the solicitor who advised them.
Finally, it would eradicate all the dirty tricks freeholders try to pull as it would make the flats unsellable.
This one form alone would go a long way to eradicate leasehold abuses.
The prescription of relativity, capitalisation, and deferment rates
The prescription of relativity would really make the process of extending leases or enfranchisement fairer and would remove the ability for freeholders to behave unreasonably forcing leaseholders to seek the help of the Tribunal.
Which relativity graph/rate should be applied? This is the tough one; whichever you choose would be attacked by freeholders. I genuinely believe that our own ‘Leasehold Valuers Graph 2017’ is the one of fairest ones but any graph can be attacked and pulled apart as defining relativity by its very nature is subjective. Parthenia’s ‘Hedonic Regression’ graph is also an unbiased and fair graph which analyses a considerable amount of prime central London data and so it could also be used but it would be beneficial if this method could be used to analyse data for the rest of the country outside of a PCL market.
Prescribing capitalisation rates and deferment rates would also be a combative process but not on the scale of relativity. Cap rates should be 8% and deferment 5.5% in London and 6% in the rest of the UK.
No Act rights deduction
The No Act rights reduction was originally implemented to allow freeholders to be able to claim marriage value in a market that did not understand the recent 1993 Legislation. The market has now changed considerably and leaseholders are very aware of the 80-year mark (which now is reflected in property prices of short lease flats); the “no Act reduction’ rule is therefore now anachronous and should be removed.
This one change in legislation would make the whole leasehold process much fairer for leaseholders and considerably cheaper when they extend their lease or purchase their freehold. It would also seriously reduce the costs of running the First tier Tribunal to argue these cases for no gain but the freeholders.
The two-year ownership rule
Currently a leaseholder has to have owned their property for two years to extend their lease or purchase their freehold (under the 1967 Act) There is no purpose to this rule and it frustrates the home buying process for many leaseholders. I would like to abolish the two-year ownership rule.
Development value for freeholds
This is a grey area freeholders use to receive unfair fees from leaseholders who wish to buy their freeholds (and cost the Government a fortune running the FtT and UT to force agreement). Freeholders routinely argue eye watering additional amounts for the ‘development value’ of a building even if they have no planning permission or plans to develop.
This could be made fairer very simply.
If the freeholder has not submitted planning permission on their property, then either no development value should be due or legislation should be changed to include a clause that says if the leaseholders develop any building or land within five years of purchasing the freehold, then an overage clause is included in every acquisition that says the freeholder receives 30% of the value of the development.
Provisions for ground rent due to head lessors
Any calculations made to compensate head lessors now use the NLF rate which gives head lessors a disproportionate return on their ground rent which was decided in the Nailrile case.
Make the compensation for head lessors to be the standard Cap rate used, there is no reason whatsoever that it shouldn’t be so. This would also act to desist freeholders from routinely granting head leases to linked companies for the sole purpose of making the lease extension process higher for leaseholders.
The six-month negotiation period
Once a counter notice has been received by a leaseholder there is an exact six-month period for negotiation. Freeholders regularly ignore leaseholders valuers during this period forcing them to make (and pay for) a protective application to the first-tier tribunal to ensure they don’t lose their legal right for a lease extension.
This is generally done to ‘bloody the nose’ of the leaseholder to let them know that they are in a battle and there is no punitive punishment for a freeholder who acts in this unreasonable manner.
The possible change to legislation could be that the freeholders who act in this unreasonable manner and refuse to enter into negotiations with a leaseholder against the spirit of the act should then be forced to pay their own section 60 costs for the process of the lease extension. This again would release a huge amount of pressure on the Tribunal service and the costs involved.
The reasonableness of a freeholders counter offer
A leaseholder has a legal obligation to ensure that their initial opening offer price for the cost of the lease extension can be justifiable. A freeholder however is under no such obligation and their counter offers can sometimes be 10 times more than they know they could achieve at Tribunal. This is done to stretch the leaseholders expectation on what they think they should pay for the lease extension and also just to be petulant.
High unaccountable counter offers inflict needless stress on leaseholders. This could be simply changed by legislation to ensure that a freeholders counter offer should also be reasonable and justifiable.
Informal lease extensions
The scandal of informal lease extensions which will dwarf the leasehold house scandal when it is realised needs to be addressed. There are tens of thousands of leasehold flats that have already taken informal deals which make their flats pretty much worthless.
Freeholders bully and coerce leaseholders to abandon the statutory lease extension process and instead enter into an informal lease extension where the ground rent will be onerous, the accelerators will be aggressive and the freeholders can insert clauses that make the leaseholder pay even more money over period of time for licences and permissions.
Informal lease extensions should be banned. If that is not possible the ground rents the freeholders can ask for should be prescribed at a peppercorn and it should be made illegal for them to insert clauses which could cause financial hardship to leaseholders.
Another consideration is to increase the tax due from freeholders when they carry out informal lease extensions thus removing the attraction for them to force freeholders to accept these deals.
It is clear that the current legislation needs to offer leaseholders more protection around the service charges they must contractually pay. This is an area of malcontent for leaseholders who believe they have no choice but to pay service charges, by law, which are often inflated. The standard of work they receive can be poor and their only form of redress is a costly and protracted FtT case.
Legislation needs to be introduced to protect leaseholders for the payments they make, offer a clear method to dispute these charges and introduce punitive measures to punish managing agents or freeholders who abuse this statutory requirement.
Reserve or ‘sinking’ funds
A similar issue exists around reserve or ‘sinking’ funds. A freeholder can introduce these payments and that money should be held in a ‘ring fenced account’. The reality is, however, that these funds are often used or disappear without any accounting of them nor explanation. Stricter punitive measures should be introduced to protect leaseholder’s funds.
Right to manage
Currently leaseholders have a legal right to take over the management of their own block on a ‘no fault’ basis.
Freeholders, however, can make considerable profits from the management of blocks of flats and they will often go to extraordinary lengths to maintain this control. This gives rise to game playing and purposeful legal blocking of the leaseholder’s legal rights. This should be removed immediately to become a simple and quick course of action to take for leaseholders.
The Leasehold Reform Act 1967 legislation
This piece of legislation is outdated, unfair and a muddled piece of legislation which requires radical amendments to make it fit for purpose. For example, the Act does not currently include any clear definition of what a ‘house’ is, despite hundreds of costly court cases on the subject over the past 50 years.
It beggars belief that the main legislative vehicle governing freehold purchases in this country can’t even agree on a legal definition of a house, particularly when new-build houses are being sold on a leasehold basis.
Introduce prescribed timelines in the 1967 Act that specify how long a freehold acquisition should take. We suggest that this should be changed and defined statutory timeframes are introduced.
The valuation methods used by the Leasehold Reform Act 1967 to establish the payment a leaseholder must pay to a freeholder are so complex only specialist valuers can understand how this works.
There are three different ways to calculate the cost of buying the freehold of a property depending on the terms of the lease, and each one is more complex than the last. What they all have in common is that they give leaseholders a legal headache and unfairly cost them thousands of pounds to buy the freehold, in addition to costly legal fees.
We believe that this needs to be urgently amended to a single, transparent method for calculating the cost of freehold purchases, so that leaseholders and their advisors are able to understand and agree a fair price with their freeholder.
In addition, there is no simple way to remove unnecessary fees or restrictions when the leaseholder buys the freehold. Clauses that require the leaseholder to pay hundreds of pounds to their freeholder for permission to change the carpets in their home, for example, have been put there simply to make money for the freeholder and are totally unacceptable.
Leaseholders currently have to apply to the Upper Tribunal to make a case or the removal of such restrictions – for which they incur further legal costs.
We would like to see legislation included to enable leaseholders to remove onerous licences and permissions during the freehold acquisition process.