Seventy key leasehold figures attend the LKP roundtable briefing on leasehold reform at Portcullis House, Westminster yesterday. Photo: Marcus Perkins
Seventy key figures in the leasehold sector – including some battle-scarred leaseholders – attended a packed Westminster on Thursday January 29 to hear how leasehold could be reformed.
The meeting was hosted by MPs Sir Peter Bottomley and Jim Fitzpatrick, and chaired by Martin Boyd, of LKP / Campaign against retirement leasehold exploitation.
It included presentations from Phillip Rainey, QC, of Tanfield Chambers, Ian Fletcher, of the British Property Federation, and Darren Eade, of the Competition and Markets Authority.
Their presentations are reproduced below.
Parliamentarians who attended included Nick Raynsford, Labour MP for Greenwich & Woolwich, a veteran of the 2002 Commonhold and Leasehold Reform Act, Lord Best, who headed the All-Party Parliamentary Group report into retirement housing more here and Baroness Gardner, a stalwart of leaseholder activism.
Among the invitees were senior civil servants, property tribunal judges, an abundance of distinguished landlord and tenant barristers and solicitors, the Law Commission, the CEO and chairman of the Leasehold Advisory Service, CEOs of property management companies and developers.
Phillip Rainey, QC, offered a detailed analysis of a bundle of leasehold laws and made the case for dumping a load of them. The views were not necessarily his own, but offered in order to ‘stimulate debate’
Baroness Gardner mischievously welcomed the presence of a representative of the Serious Fraud Office at the meeting – perhaps a leasehold sector first.
Phillip Rainey’s presentation was nothing less than a manifesto of legal reforms to the leasehold sector (and will be considered in a separate article).
“It should not be assumed that I agree with all or indeed any of the ideas set out below,” he said. “The intention is to stimulate debate …”
Among the suggestions were:
Abolition of forfeiture, clarify and simplify right to manage procedures, prohibit the grant of leases of between 21 and 999 years to eliminate “the wasting asset problem”, prohibit long leases on houses, regulate managing agents by extending existing Housing (Wales) Act 2014, … and “a modest and non radical suggestion for immediate reform” confer on the First Tier Tribunal the power to consider challenges to exit fees in retirement leasehold.
These suggestions sound joyous to LKP, which prompts the question why it has taken a minnow organisation like us to get them asked?
Ian Fletcher, of the British Property Federation, warmly welcomed the initial work of Martin Boyd, of LKP, which went on to further analysis by DCLG which allowed them revise the official number of privately owned leasehold properties in England to 4.1 million.
“This was a huge phenomenon, with private sector flats constituting just 12 per cent of new supply in 1997/98, and growing to 46 per cent in 2008/09,” said Mr Fletcher.
“In the housing association sector the growth was similar, up from 29 per cent in 1995/96 to 66 per cent in 2007/08.
“Since the turn of the millennium there have been 715,000 flats built in England.
“In addition to the 4.1 million privately owned leasehold properties there are 1.85 million in the social sector, if we take the data from the census and subsequent building. In total that gives almost six million leasehold properties and flats in the private and social sectors.
“…For future development flats will represent a much higher percentage of new build. In most of the major cities flats represent more than 50% of new building and in the capital that figure has averaged 87% of all new build across the private and social sectors since 2004.”
Mr Fletcher also addressed the property issue of flat owners renting out their properties on ultra short-term lets for tourists and business people.
“This has led to a growing industry where residential homes are used for the permanent and consecutive commercial letting of holiday space, the business deriving significantly more in rent than would be derived if the flat was let for use as a home.
“This has led to a significant clampdown in comparable tourist cities like Paris, where new laws have been introduced, and in New York, where zoning laws are being enforced more.”
Ministers are seeking a “middle ground” that does not penalise those who genuinely rent out their flats because of short-term need and those running an apart-hotel business.
Gerry Proctor, of Engage Liverpool, said the practice was certainly not confined to London, and was causing ill-feeling among residents in the city.
Mr Fletcher said the BPF backed the argument that commonhold is a housing issue and should move to DCLG from the Ministry of Justice, where it currently sits.
The BPF also backs including leasehold properties in the government’s Flood Re flood insurance scheme, which has been reported on LKP here http://www.leaseholdknowledge.com/tag/flood-re
Finally, the BPF is “supportive of making it easier to get recognition of a tenants’ association” – a particular obsession of LKP.
And here is an example of a freeholder who spent £74,560 in the property tribunal trying to resist a recognised residents’ association … whose sole power of note is to appoint an auditor to examine the books.
Finally, Darren Eade of the Competition and Markets Authority discussed the recent report into residential property management services.
The issues have been discussed on LKP here
“Leaseholders often feel poorly informed and have a limited understanding of their liabilities when they purchase a leasehold property,” said Mr Eade.
Lack of leaseholder education – which is odd compared with the certainties experienced on the continent where commonhold exists – is a repeated mantra by the sector.
But it is not only leaseholders who are poorly informed, as is demonstrated by officialdom working on a figure of 2.5 million flats six months ago.
“Bad outcomes weren’t particularly associate with small or non-trade association member property managers – complaints were spread across all providers,” said Mr Eade.
The CMA’s recommended legislative changes were to review section 20 regulations and “introduce new powers to leaseholders to influence the appointment of and tendering for property managers short of full right to manage”.
Our sincere thanks to Katherine O’Riordan, of Sir Peter’s office, for organising this event.
The list of delegates and the presentation papers are below:
January29Delegates January29consolidatedpapers
Related posts:
Campaign against retirement leasehold exploitation / LKP holds Westminster meeting on commonhold
We launch leasehold manifesto … as housing minister thanks LKP / Campaign against retirement leasehold exploitation for 4.1m leasehold figure
Urgent need to revisit leasehold reform, say Lords
AgeUK: Retirement leasehold IS NOT WORKING and needs urgent reform
Having 70 key figures attending the “leasehold reform” meeting is a good start. Scanning the attendance list , I can see representatives from Government Circles includes :
Law Commission : 2 lawyers + 1 research assistant.
Competition & Markets Authority: 1 director and 1 team leader
Ministry of Justice: : 1 Head of Civil Law
MP : 2 Members and 3 research assistants
SFO : 1 Head of Strategic Relations.
But I would say the missing figures are ” Key Decision Makers’ from Government Circles :
Housing Department : Housing Minister & Senior Civil Servants
HMRC :
Treasury Economist.
How can you have any leasehold reform if the key decision makers are not at the meeting ?
Successive Housing Ministers’s Government policy have maintained that new build property sold under Freehold or, Leasehold or Commonhold Title are acceptable but in practice Commonhold Title has not been offered or adopted by builders in E&W . Every Government Minister should be asking why Commonhold Title is not being adopted and why E&W remain on Leasehold System when all other advanced countries have taken up Commonhold system.
Why has the Government chained the house buyer/consumer to the Leasehold system ?
The sale of new property under freehold title or Commonhold title or leasehold title is decided by the developer and NOT by the buyer ( consumer).
When freehold or Commonhold property is sold, the typical consume/ buyer can pay a 25% deposit and using 75% repayment mortgage after say 25 Years, will own fully own the property asset.
But when the property is sold under leasehold title , the buyer actually buys a long term rental contract for use of property for a number of years , usually 99 years or 125 years , The legal ownership of the property is not sold to the buyer and so the lease is actually a business asset for the freeholder. The Buyer of leasehold property pays a premium for the lease which at the end of the term falls to zero premium when the flat returns to the freeholder. So the buyer is paying for a wasting asset.
A builder will price the sale of leases for new build block of flats at the market rate and later sell the freehold title for the block of flats for an extra 1.5% of total sales revenue. The major developers may be getting a typical 15% profit margin on the sale of properties plus a further 1.5% for the freehold. So sale under leasehold title bring extra 10% profit upon first sale for the developer. The Developers being in business for profit, will offer whatever property title that brings the highest profit. This explains why no commonhold title property is offered for new build flats even 10 years after introducing Commonhold legislation in 2002. .
Because the Government supports the Rule of Law and Housing Department is the process custodian of the Landlord & Tenant Act and associated legislation, we should NOT expect the Housing Minister and Senior Civil Servants to be the leader in Leasehold Reform. The Housing Ministers and Senior Civil servants periodically go through the motions of consulting professionals in the industry but they habitually ignore the leasehold complaints raised by MPs on behalf their constituents and leaseholders.
If we look at leasehold from the tax situation, we will find the following UNFAIR situation :
1. Leaseholders must BUY their leasehold property from earnings after paying 20% or 40% income tax.
2. Developers will usually sell off the “freehold title” for blocks of leasehold flats within 2-3 years after building completion to comply to VAT rules ( for recovery of VAT paid out during construction stages.).
3. The companies buying “freehold title” ( called freeholders ) from the Developers to collect ground rent from leaseholders are given valuable tax concession and can deduct the “annual loan interest” from “rental income”.
This means the leaseholders are paying income tax towards the upkeep of Government , Courts , Judges , Tribunal , MP’s Salaries etc whilst the “freehold companies” are enjoying the favourable decisions in Court and FTT without paying any corporate tax .
The Government’s Housing Policy of allowing the Developers to gain an extra 1.5 % revenue by selling property under leasehold title gives each leaseholder a 100 year problem and transfers the family savings to the freeholder due to the premium paid for the lease being a wasting asset and reducing in value on a yearly basis.
Looking at the leasehold system from a “macro perspective”, the 4.1 million leaseholds in private blocks probably have an estimated 4.1 Mil x 175,000 pounds average property price = 717 Bil pounds invested in premiums to buy the leases for their leasehold property blocks. Since this money has to come from earnings after deducting 20% or 40% tax , the ball park figure of total tax gained by Government is atleast 143 Bil Pounds
But if we study the filed accounts of just one residential freehold investment company : Proxima GR Properties Ltd, you will find the paid up capital is 28 Mil pounds and total borrowings about 0.9 Bil. Based on 30% deposit on borrowings, we can calculate the Proxima’s freehold portfolio is estimated at 0.9 Bil / 0..7 = 1.28 Bil. pounds. ( this corresponds to 128 Bil invested by the leaseholders in the leases or 18% of the total leasehold stock in E&W ) . When the leases reach expiry date, the leaseholders premium will be reduced to Nil and the value remaining in the properties is gained by the freeholder. So the leasehold system wipes out the savings of 4.1 Million leaseholders and transfers their property value to the freeholder company which has been aided by an unfair Government tax policy.
This freehold company is owned and controlled by Tchenguiz Family Trust Based in the British Virgin Islands, an offshore tax haven.
What is the economic sense for Government to maintain a “leasehold system” which transfers the saving of the leaseholders into the bank accounts of companies controlled by entities in the BVI ?
It would not happen if the properties were sold under Commonhold title. or under 999 year Leasehold with Nil annual ground rent.
I have been following the Greek Sovereign debt crisis with debt quoted at US$ 300 Bil (on Bloomberg TV). The population of Greece is about 11 mil. and millstone debt burden is GBP 200 Mil.
In the above post I have calculated the 4.1 Mil leaseholders stake in E&W leasehold property is GBP 717 Bil which is an even bigger millstone than the Greek Sovereign Problem. Probably 4.1 Mil leaseholds may affect the lives of approx. 11-12 Mil persons under the debt burden imposed by the leasehold system.
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The 4.1 Mil Leaseholders stake in leasehold property which I calculated at GBP 717 Bil is approx. half of the National Debt which is ticking up to GBP 1493 Bil ( which is a direct burden on taxpayers and time bomb on 60 Mil UK population ). The 4.1 Mil leaseholder will lose GBP 717 Bil when the lease term ends and the capital value transfers to probably companies based in the BVI . The system transfers the savings from retired and working leaseholders and exports capital to BVI.
Clearly the Housing Minister should start looking at the financial time bomb called “leasehold system” and why Government have it imposed on home buyers when it clearly does not benefit the home buyer,
The leasehold system has been subject to lack of effective regulation by successive Housing Ministers and Senior Civil Servants who have made a serious administrative error in failing to recognise even now that ” leases written on unfair terms” demanding income from ground rents , subletting consent fees , exit fees etc are used as springboard and pledged to service payments for high risk loans.
St George Plc ( member company of Berkeley Group) constructed a development of freehold houses and 54 leasehold flats which completed during 1998-1999. The 54 flats were sold under leasehold title at average 140K pounds price level and annual ground rent starting from 175 pounds /year. Not long after building completion, the freehold title for the 54 flats was sold for 112K pounds to Peverel who were the managing agents on site.
The leaseholders were offered RFR ( Right of First Refusal ) but to accept the offer required collective acceptance by 2/3rds of the leaseholders, I was one of the organisers for raising contributions to buying the freehold but I could not find enough support from leaseholders to pay 2100 pounds each. Some of the buyers were young couples who declined to support the freehold purchase giving the reason as they expected to move after 3-4 years. It was difficult to contact the off-site leaseholders of the rental flats for getting any support as BTL tenants living at the flats just don’t want be involved.
Looking back, I believe Peverel may have acquired the freehold title for 30% deposit ( 36K) and borrowed the 70% ( 80K) to finance the purchase. and easily service the mortgage loan interest from the annual ground rent of 54×175 = 9450 pounds. But since constituted as a company, Peverel can charge the mortgage interest as an operating expense against their rental income to reduce their annual tax liability.
So the 54 leaseholders would have paid 25% deposit for their flats and financing 75% by mortgage loans to invest between 7-8 million pounds stake in the building .But the freehold title was bought by Peverel for an estimated 36K , to hold indefinitely since the tax rules allowed Peverel to charge mortgage loan interest against rental income. In fact 10 years later around 2010, I remember seeing the accounts of one company in the Peverel Group reporting profits of 700 Mil pounds but paying less than 2 Mil for company tax whilst the standard tax rate at 30% would have put the proper tax bill at 210 Mil pounds. Where did all that profit go as Peverel Group was place in Administration in Feb 2012 for breech of banking covenants ?
Buyers of leasehold property are paying for property from earnings after income tax at 20% and 40% to HMRC but freehold investment companies can buy the freehold property title using debt financing and pay little or no tax due to tax concession.
The leasehold property system is NOT fair to consumers when freehold companies are using debt financing and not paying tax at 20% and 40% like the leaseholders. England and Wales are the only advanced countries to continue using leasehold title and keeping unfair outdated legislation to slowly destroy the family savings base of its citizens. St George could easily have added an extra 2K to property sale prices and given the freehold title free to the leaseholders.
Even Scotland has stopped using leasehold property title. Why hasn’t Housing Minister and Housing Senior Civil Servants made any effort to find out why Commonhold title is not used ?
So in this example, the leasehold buyers paid 7-8 Mil pounds in premium for the leases but do not get any ownership of the property.property . The premium is a wasting asset and falls to Nil when the property is handed back at the end of the lease term.
The freehold title is sold onto a “ground rent investor company” for 112 K pounds but has financed the purchase of the property freehold title with 30% deposit ( or 36K pounds ) and 70% bank loan and gained an annual stream of ground rent income to service the loan repayments. The loan interest is allowed under hmrc rules to be charged against the rental income and so pays little or no tax.
So you can see the advantageous situation for freeholders wishing to exploit the leasehold system is low cost entry and annual support from the Tax Office. The leasehold system is unfair to the leaseholders who are not able to defend themselves against exploitation by unscrupulous directors of freehold companies .
When banks make business loans to freehold companies investing for ground rent income , the lender will register a charge against the freehold title record kept by Land Registry and also a charge against the freehold company at Companies House. This charge prevents the freehold assets or the borrowing company being sold without repaying back the bank loans.
When external freehold companies apply to a bank for loan facilities , it is easy to show re-current rental income from the collection of annual ground rent and succeed in applying for the loan .
But when a majority of leaseholders collectively act to enfranchise their block , its very difficult to obtain loan financing because the banks don’t recognize them as bank customers with good credit record and don’t treat the saving in annual ground rent payment for the leaseholders as equal status to annual ground rent income paid to the freeholder..
So it should be recognized that freehold companies engaged in leasehold abuse to increase their income may be substantially financed by reckless managed Banks using honest money deposited by the local community. We have seen how CBG controlled by the Tchenguiz Family Trust ( based in the Offshore tax free British Virgin Islands , had borrowed heavily from Merrill Lynch , HBOS and Kaupthing ( Iceland ) which all became insolvent and bankrupt in 2008. CBG used those loans to take over substantial ground rent Investment companies including Solitaire group and Peverel Group and MacCarthy & Stone Retirement Homes freehold portfolio. Many freehold titles were transferred to Proxima GR Properties Ltd which was report in the Sunday Times (15th Feb 2015) as not able to repay 435 Mil pounds owing to Prudential and Bank of America Merrill Lynch.
At the LVT Tribunals , the LVT procedure is to treat the freeholder and Leaseholder as equal but when many freeholder companies are financed by huge bank loans, the bank charge holders should be forced to attend the LVT proceedings and held fully accountable for leasehold abuse and leasehold exploitation.
Does anyone understand what I have tried to expose about the economic side to the UNFAIR leasehold title property system ?
If everyone behaves like the 3 proverbial monkeys “see nothng ,hear nothing and say nothing ” there cannot be any reform.