Lease extensions for flats – surely just another scam?


Labour Tory quotes

Perhaps I have missed something…?

So you know how it works on the BBC show, Homes under the Hammer: canny buyers pick up a bargain derelict property at auction, gut the interiors and have the local experts round to gush over the yield potential on their investment and initiative. The canny buyer pays once for the deal. The rest of their outlay goes on the building. Pretty much any freehold transaction goes this route, whether it is a derelict at auction or general trade.

But nobody – seems to me- mentions the real reason why leasehold is an utter scam as compared to commonhold.

In the latter case, as with those canny freehold buyers, any wealth available to owners over time can be focused on maintaining the buildings, not handed over as undiluted profit to investor ‘landlords’ who pay nothing to upkeep their ‘investment’, or their out-of-control agents.

And to be clear, Right To Manage offers no help. Not only does the freeholder still get to charge consent fees (renamed fees ‘not to object’) for whatever takes their fancy and for doing no work at all, the lease extension must go through that external canny investor with their eyes on the prize of maximum yield.

Let’s imagine you own a lease in a block of flats. You have an external investor freeholder. Maybe one of a series of exploiting agents for good measure?

Let’s say the block was built in 1980 (random date). It is now 2017.The original leases are reduced to 62 years from their original 99 years. You, as leasehold owner, are buggered unless you find a cash buyer or can afford to extend your lease. So far so clear.

According to theological graphs (i.e. of relativity but not Einstein’s), your lease is worth about 84% of its maximum value (reduced by a further 5% or so by tribunals when applying their theology for the extension premium, because they do not recognise the real world – no, seriously).

To protect the value of your lease you need an extension. Everyone says this. All the experts point it out. Many offer to help you get your extension. According to the Leasehold Advisory Service you have a choice, and choice in this regard they say is GOOD. You can agree an informal extension, or seek a statutory extension.

Either way, you pay a large premium and all professional costs. There is never a chance that in the theological world of lease extensions your lease’s value does not increase after the extension. This is why the freeholder gets to carve out yet more profit from ‘marriage value’. The government was quite anxious about this at the time.

In addition, the freeholder gets helpful clauses added to the new lease granting them the right to seek redevelopment at the end of the ORIGINAL lease. The lessee, allegedly, would be entitled to ‘market value’ should this occur. Now it does not take a property expert to realize you cannot redevelop one flat. That would be refurbishment.

Assuming you went the statutory route, 62 years from now you (or your kids unless you found the elixir of life) would still have a 90 year lease with peppercorn ground rent. All good, eh? Sale prices would have inflated over those 62 years, right?

But hang on.

No building lasts forever. There comes a point where you cannot ‘plaster over the cracks’. Is it possible after 99 years that the building or even the area will be undesirable? Perhaps it will, perhaps it will not. Nevertheless, you WILL pay a huge premium for that extension now. The freeholder investor takes absolutely no risk.

And what if the other flats do not extend their leases? It is perfectly possible that your expensive outlay on an extension – which adds nothing whatsoever to the physical well being of the building and is merely a further significant slice of easy wealth for the freeholder – could see the lessee of your flat at that time high and dry in a dilapidated building with a freeholder investor who is now all powerful despite those expensive (to you) extra 90 years on the lease.

I guess you are thinking, who cares, I will have sold up long before. But that’s my point. Nobody points out that extending a lease could be a financial joke unless you know you plan to sell way long before the end of the existing lease. I’d say your inheritors would be well advised to flog it as soon as you expire, whatever the extended period. Frankly, I would not wish leasehold on any offspring. Why pass on your stupidity?

For sure, there must come a point where your building will be undesirable by virtue of sheer passage of time.

The difference with leasehold is that you have no control over events, unlike owners of a freehold. Our development saw no exterior refurbishment for 30 long years until we acquired the right to manage. Managing agents have no investment in the building and investor freeholders, I suspect, look more to short term profit, realising the true life-expectancy of their future reversion. They have no interest I can see in keeping the building in good order (other perhaps than profiting from major works) if they stand to redevelop a more quickly degenerated site.

At what point does the right to a lease extension offer the ever-paying leaseholder any benefit in reality?

A freeholder who buys an old house knows it is in their hands entirely whether they either now or later gut and rebuild, or let it run down to dereliction. If they acquire any funds in older age they can spend them on the premises, not to profit a parasite ‘landlord’ investor.

The whole leasehold caper is a scam, in my opinion.

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