Lease extensions -the basics

Lease extension

Introduction

In this series of posts I will dig into the horror (from a leaseholder’s point of view) that is the residential lease extension valuation caper. There is much profit to be made at the leaseholder’s expense. This seems to be the deliberate intention of the legislation.

As mere mortals we live in the real world. Not for us the opportunity to create our own reality.

Despite the Noble Lord Boardman’s reported views in Hansard prior to the 1993 Act:

When they entered into those leases they knew the terms that were on offer. They knew the period of the lease, the amount that was going to have to be paid, and they knew all the provisions. There is no doubt they took wise advice, and on wise advice they probably set up sinking funds.” does anybody really believe leaseholds are ever sold based on the lease term and with full professional ‘wise’ advice as he claimed?

I would like to have looked this Noble Lord in the eye as these words were uttered: “they knew all the provisions”. Really? Methinks m’Lord was accustomed to reading the small print in every credit contract or banking terms and conditions, and what is more could understand them.

Sale signIf the sale signs said “Lease for Sale” then maybe somebody would just for once focus on the item actually for sale. But leasehold is sold as “Flat for Sale” or “House For Sale” and the scandal of leasehold is that it cons ordinary people into thinking they are buying property as a ‘home owner’. The ‘lease’ is the deed just like any property has a deed. This of course is a disastrous misunderstanding of a lease.

Whatever the Consumer Protection from Unfair Trading Regulations 2008 (CPRs) and The Business Protection from Misleading Marketing Regulations 2008 (BPRs) may say about the obligation of estate agents to state the tenure in sales particulars, I routinely have found properties for sale that either say nothing about tenure, or something vague such as “To be determined”.

ETSOS knows a thing or two about estate agencies. It says of the new regulations, ” they are a move away from “buyer beware” to put more responsibility on both the seller and selling agent not to engage in what is seen as unfair practice.”

Ironically, the £leasehold caper operates on a basis somewhat more cynical than “Caveat Emptor”. Not only must the buyer beware what instance they are buying of a particular thing, in leasehold the thing itself is not what is being sold to them. And little sign of consumer protection?

The average citizen relies on professionals to look out for them when house buying. The process is well-trod: first you pore over estate agent blurbs and go viewing. You check out the location and the property and whether you can afford the mortgage. Your measure up for curtains and perhaps fret about the unseen drains and that dodgy dip in the roof. The lease, if mentioned, is a mere contract matter. Surely a lease could not be a rip off in the 21st century? Not with all these laws we trip over as soon as we wake up?

Besides, property does not sit around on a shop shelf. You are aware you have to compete in a real market place, and the perfect home might be lost if you are slack. If you get an offer accepted, you hurry off and instruct your professionals.

Buyers engage surveyors and solicitors to cover their backs. If the 2017 scandal in doubling ground rent  is to be understood, it seems the professionals were to blame, not the system? This argument, I would hope, can be seen as nonsense. The whole premise of the £leasehold caper is of course to blame. The professionals deal with the world as it is. Otherwise they would have to advise all potential buyers never to touch a residential lease. Now that really would scare the horses.

The scandal to me is that this country’s legislators normalised a lucrative caper of selling residential leases which are not home ownership, no matter in what niche of the market these properties are advertised. In a broken housing market, with most of the tax-funded social housing sold off for votes and insufficient new social housing built for a couple of generations, and developers allowed to dribble out new-builds to ensure a restricted supply, leasehold is a huge portion of what is on offer to those who aspire to own rather than rent.

The sane and sensible answer would be not to buy leasehold. None of it. Periodic rental may be insecure but at least the landlord picks up the tab for repairs and maintenance. You know where you stand. The rent is for the right to occupy. None of the fleecehold fees and outrageous major works bills that the average income citizen could not expect to afford.

People buy leasehold because the system has conned them for generations. We humans are gullible like this. If something appears to be common, we find nothing wrong with it.

When arsenic was found in wallpapers and asbestos pretty much all over our homes and chemicals poisoned our waterways and exhaust fumes our air and fags our lungs, we still bought those products because it was seen as normal. Just as when new-fangled electricity killed us by the dozen because the dangers were not made clear or the new contraptions were lethal. The list is endless.

Once upon a time we might have owned slaves as normal. If something is a norm the vast majority of people assume it is, er, normal. Acceptable.

Leasehold is a scam. I use the word ‘caper’ as it softens the edges. Leasehold is now a peculiarly English and Welsh scam. Personally, I think the reason is tied up with the way we still accept a House of Lords in a 21st century yet oldest’ democracy. We are a nation of ‘cap doffers’ who accept our betters know best. If they say leasehold is perfectly okay, who are we to argue. Four million of us have bought into this caper.

The extension caper in context

Leases are a depreciating asset. The lease falls in value as the term runs down while the freehold value increases.

Those who argue that there is no alternative to leasehold conveniently ignore one aspect: there is no compelling reason (other than greed) why a residential lease should be for 99 years or 125 years as apart from 999 years. The choice of 99 years is clever. Babies do not buy leases. The first buyer instinctively knows the lease will outlive them and that is probably as far as they think it through. If they do consider the matter of the term, they will also be reassured that they will retain sufficient years to ensure they can sell it on. That 80 year ‘marriage value’ threshold seems a long way away.

So new leases are bought. Day after day. Once buyers are ensnared, it is no longer the freeholder’s problem. Now the leaseholder has to do everything they can to avoid undermining their asset’s value for resale. If the anecdotes are correct and sales occur on average every seven years, a 99 year lease might be attractive to the first and second buyer. Both can ‘escape’ before the lease drops to 80 years if my maths is right.

It is the third generation buyer of a lease who is stung. Well stung. Suddenly the reality of what a lease really is begins to strike home. And the scandal is discovered, but it is too late.

The same applies with major works and service charges. These are unlikely to be a problem for the first two ‘owners’.

Ground rent of course is built into the lease. But here again the leasehold caper is clever in how it buries the consequences in obscure legalise. No government as far as I know has required transparency in residential leases in the same way they enforce credit terms and utility tariffs to be clear. Leasehold has been confined to that “keep quiet and don’t scare the horses” backwater of English law, a bit of tinkering here and there but substantially keeping the money tree intact. I think it was Margaret Thatcher who said the best word in the English language was ‘leasehold’. It is the sort of thing she would have said.

The real world housing market does not operate according to relativity graphs. The leaseholder of a flat who does not wish to sell, or perhaps cannot do so due to their short lease, finds themselves in a catch 22 if they decide to seek a statutory lease extension (I am not talking about the minefield of the informal offer).

The formula process is complex. But long before you can resort to the certainty of the maths (or hope that the professionals you pay can do so), there are various important ‘variables’ to establish. No formula can work without its variables. This is probably where we all wish we paid more attention in algebra.

The Law

To learn the detailed twists and turns, first visit Lease.

Part I of the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993) gives qualifying tenants of flats either:

  • a collective right to buy the freehold of the block (collective enfranchisement) if the flats are contained in premises that satisfy certain conditions

  • an individual right to a new lease expiring 90 years after the termination of an existing lease with peppercorn ground rent.

Meanwhile, the Leasehold Reform Act 1967 confers on a tenant of a house for the last 2 years under a long tenancy at a low rent the right to either:

  • acquire, on enfranchisement, the freehold

  • obtain an extended lease of the house and premises expiring 50 years after the date on which the existing term is due to expire – section 1AA of the Leasehold Reform Act 1967 (as amended)

These posts cover flat leases.

Background to 1993 Act

Some comments made in Parliament prior to LRHUDA 1993 passing make interesting reading twenty-four years on:

It is rare that a Bill should come to this House which has already had quite so much discussion outside the House. But I am glad to say that the discussion which has taken place both in another place and outside this House has certainly created a great deal of interest.”

Part I will give most long leaseholders of flats the right to purchase collectively the freehold of their building; and it will extend the right to buy the freehold at a fair market price to the owners of high value long leasehold houses.”

The first Bill to provide a right to enfranchise was introduced in 1884. The Conservative Party promised enfranchisement on fair terms in 1966, although it was of course a Labour Government who introduced the Leasehold Reform Act 1967. That gave most long leaseholders of houses the right to enfranchise.”

People who buy long leases at low rent are generally thought of as owner occupiers, even though they are tenants in the eyes of the law. This contradiction produces two distinct problems for the leaseholder.

The first is that a lease is a wasting asset. A new long lease is equivalent in price to a freehold but its value declines inexorably as its term expires. This makes a lease increasingly difficult to mortgage, since building societies are usually only prepared to lend on an unexpired lease of at least twice the mortgage term. This problem is now becoming acute because so many long leases of flats date from the new owner occupiers of the 1950s. As they have become un-mortgageable, so the urgency for this reform has increased.”

The second problem is that because a leaseholder remains legally a tenant, control remains with the freeholder. This is a particular problem with flats where the communal nature of repair, maintenance and insurance gives control of the block to the freeholder. Yet all the costs fall to the leaseholders. Research by the Consumers’ Association found that two-thirds of leaseholders reported problems with their landlords, nearly half of which they considered to be serious. Typical problems identified included overcharging for services, misuse of funds, suspected non-payment of insurance and harassment.”

This Bill addresses these problems. It is one more stage in the Government’s commitment to encourage owner occupation and to enable an estimated 750,000 long leaseholders to take full responsibility for their own property.”

{Me: That went well. Things now turned interesting…}

I know that there is concern that landlords will not receive proper compensation for the loss of their asset. I am happy to reassure your Lordships that there is no element of confiscation in our proposals. Landlords will receive the full market value of their asset plus reasonable costs.”

…there will be many occasions when it will be appropriate for the landlord to receive more—perhaps even substantially more—than 50 per cent. of the marriage value.”

Where a block is not eligible for enfranchisement, the Bill will give long leaseholders the right to individual lease extensions at the market price. This will tackle the problem of diminishing leases. Extension will be for a 90-year term and at a peppercorn rent.”

Lord Strathclyde, Hansard, Debate 23 February 1993 vol 543 cc85-176 85.

Common kill switch to reform

A common kill switch for leasehold reform is summed up here:

Following what has been said earlier in this debate, may I make one reference to the position of long leaseholders under contract. First, when they entered into those leases they knew the terms that were on offer. They knew the period of the lease, the amount that was going to have to be paid, and they knew all the provisions. There is no doubt they took wise advice, and on wise advice they probably set up sinking funds. There is no sudden hardship on those terms for breaching that contract purely on the ground that they have a wasting asset. I wonder whether freeholders should be compelled to bale them out, and to give them, as well, a bonus.” Lord Boardman, Hansard, op cit.

I could go on but that is enough. It pays to know the basis on which Parliament approaches any reform.

In the next post in this series I will delve into the lease extension process itself.

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