Tough times ahead predicted for leaseholders

Published by Hannah Nemeth on 19 January 2017.
Last updated on 19 January 2017

Model house

If you are one of the UK’s 4.1 million homeowners who holds a lease on their property, then 2017 could be your annus horribilis, according to a leasehold expert.

Louie Burns, managing director of Leasehold Solutions, which specialises in helping clients to extend their lease or buy the freehold of their property, says that flat owners will find it more difficult - and costly - to go to court and to deal with other issues such as ground rent or the right to manage their own block.
 
Mr Burns says: “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.”

Court fees


From 2016, fees were introduced to take legal action in the First-tier Tribunal (Property Chamber). This means that leaseholders wanting to challenge unreasonable freeholders in the courts now have to pay an application fee of £100 plus a £200 charge to attend a hearing.

Mr 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.

 

The ‘Mundy’ effect


In May 2016, the Upper Tribunal (Lands Chamber) made a landmark decision on leasehold relativity (Sloane Stanley Estate v. Mundy, 2016), which means that leaseholders will continue to pay more to extend their leases.

The Upper Tribunal ruled against a new relativity graph proposed by Parthenia Valuation, which would have reduced the cost of lease extensions for flat owners if their lease were to fall below 80 years.

Mr Burns says: “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

Leaseholders also need to watch out for freeholders asking for ground rent that doubles every year, or lease extensions that are not what they seem.

Leasehold Solutions gives the example of one unscrupulous freeholder in the Midlands, who was singled out in a recent parliamentary debate on leasehold issues. Martin Paine was exposed for selling informal lease extensions of 99 years at Blythe Court in Birmingham, with ground rent doubling every 10 years.

However, on completion, the leaseholders found the 99 years started from when the lease was originally granted, so while the length of the lease remained the same, the new ground rent was up to £8,000 a year. In the debate, Sir Peter Bottomley MP called Paine “a crook who is turning sleaze in leases into an art form”.
 
Mr Burns says: “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.”

New National Loan Fund rate

The government has replaced 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 –with the National Loan Fund (NLF), a daily spot rate calculated on the day the Notice of lease extension is served. At its introduction, the NLF rate was much lower than the CONSOLS rate and continues to fall in line with interest rate deflation.

Mr 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


A new ruling in the wake of a 2015 court case (‘Triplerose Ltd v Ninety Broomfield Road’) means that a right to manage application must now be done on a block-by-block basis. So flat owners living in a development of four small blocks all owned by the same freeholder must now make four separate applications for the right to manage, which means four sets of fees and costs.
 
Mr Burns says: “This decision provided freeholders with another powerful weapon to frustrate flat owners’ aspirations to manage their own block.”

Battles ahead in 2017

Mr Burns says further plans are in the pipeline for 2017, which will also impact negatively on leaseholders.

There is growing evidence that large freeholders are trying to argue for lower capitalisation rates, which are used to calculate the ground rent due to the freeholder. This will drive up the lump sum payable to the freeholder when the lease is extended.

Another issue is 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. Mr Burns points out that even a 1% reduction in the rate (from its current figure of 5%) would have huge financial consequences for leaseholders.

He concludes: “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.”

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