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Will 2017 be the Worst Year for Leaseholders Ever?

It’s safe to say that 2016 has been one of the worst years to be a leaseholder in recent memory. With high court fees, rising fees, and ground rent scandals, there hasn’t been much to be optimistic about.

 

Court Fees

The idea to introduce court fees was initially proposed back in 2015 and suggested that application fees for the First Tier Tribunal should be introduced and must be paid by the applicant. To the detriment of the UK’s 4.1 million leasehold property owners, this proposal was implemented in the legal process in 2016.

 

For the foreseeable future, any applicant must now absorb - in its entirety - the new £100 fee for a court application in addition to a £200 charge to attend a hearing. At a glance, the new fees may appear fair. However, with applications predominantly made by leaseholders against false-hearted tenants or unreasonable freeholders, this extra financial burden will primarily effect flat owners simply wishing to exercise their legal rights.

 

The introduction of these fees will discourage leaseholders from applying to the court and will allow some of the more unscrupulous freeholders free to exploit leaseholders; particularly those who cannot afford the application fee.

 

The ‘Mundy’ Decision

In May of last year, the Upper Tribunal (Lands Chamber) handed down its landmark decision on leasehold relativity (Sloane Stanley Estate v. Mundy, 2016). In one of the most significant rulings in the history of leasehold enfranchisement, the Upper Tribunal ruled against a new, scientific, and less partisan (ergo fairer) relativity graph proposed by Parthenia Valuation, which would have reduced the cost of lease extension for flat owners, in the event that their lease drops below 80 years.

 

‘Accepted’ relativity graphs have typically been funded and forced through the courts by wealthy freeholders to benefit their interests. Unfortunately for leaseholders, this case was no different. Despite Patrthenia’s model, the Upper Tribunal ruled in favour of another relativity graph which recommends even lower relativity in relation to the amount of years left on the lease and, as a result, leaseholders will now be forced to pay even more for their lease extensions. Freeholders will be able to further exploit leaseholders protecting their investments and demand larger fees for the extension of their lease or freehold purchase; good news for already wealthy freeholders, but a very unfair result for leaseholders.

 

In addition, recent evidences suggest that this case has also caused a hardening of the freeholder’s stance across the UK. Lessee-freeholder disputes in negotiations relating to lease extensions are arising more frequently, and leaseholders are having to attend the Tribunal more often to argue the unfair price demanded by their freeholder. What’s more, any leaseholder taking their freeholder to the Tribunal is then penalised again as a result of the new Court Fees proposal, ruling that the applicant must absorb the court application and hearing attendance fees.

 

For more information regarding the 2016 Mundy decision, please feel free to check out our post from 29th May last year, ‘Flat Owners Betrayed by New Ruling on Leasehold Relativity’.

 

CONSOLS Replaced with the NLF Rate
In addition, the government replaced CONSOLS - an index used to value the premium due to a freeholder for the loss of any ground rent due to them during a lease extension – with a new National Loan Fund (NLF) system.

 

The NLF is a daily spot rate calculated on the day the Notice is Served. At its introduction, the NLF rate was already considerably lower than the CONSOLS rate and it continues to fall in line with the currently deflated interest rates.

 

On the face of it, the NLF system may make sense. However, this fundamentally flawed system will ultimately have negative financial implications on those leaseholders who have a ground rent element to their lease. For example, if the amount due to the freeholder under the old CONSOLS rate was calculated to be £12,000 at the time of Notice Serving back in September 2015, the amount due would amount to approx. £20,000 if the Notice was served today under the new NLF system.

 

Right to Manage by Block

There was another decision earlier this year that came as a result of the ‘Triplerose Ltd v. Ninety Broomfield Road’ case, which will have a serious effect on a leaseholder’s Right to Manage.

 

A new ruling has changed the Right to Manage process from one which allowed leaseholders to acquire the Right to Manage by development to one which now means that a Right to Manage application must be done on a block by block basis. For example, if a lessee were to live on a development consisting of three separate blocks of flats all owned by the same freeholder, they must now make three separate applications for the right to manage. That’s three separate companies, three sets of directors and, ‘surprise, surprise’, three sets of fees and costs.

 

The decision to make it more expensive for lessees to acquire the Right to Manage only widens the social and economic divide between the leaseholders and the freeholders and facilitates freeholders to further frustrate those who aspire to manage their block. It is but another example of how UK legislation continues to bolster freeholders unwilling to let go of the cash cow that is management.

 

Ground rent scandals

2016 was the year for high profile ground rent scandals. A series different, but equally eye-watering scandals brought the discussion surrounding the regulation of ground rent rates to the forefront of the British media.

 

One concerned the sale of informal lease extensions to flat owners at Blythe Court in Birmingham. The freeholder in question, Martin Paine, was exposed for selling informal lease extensions of 99 years, with ground rent doubling every 10 years. It was found that, upon “completion” of the lease extensions, the 99 years “extension” started from when the lease was originally written - meaning the length of the lease remained the same and was in fact not extended at all - but in addition the new ground rent was changed to figure as high as £8,000 a year; making the flats practically worthless.

 

Another concerned property developer Taylor Wimpey, who were exposed for selling ‘virtual freehold’ properties with 999-year leases. It was found that ground rent clauses inserted into the leases facilitated the freeholder (Taylor Wimpey) to double the ground rent charges every 10 years from an initial £295 per year. Subsequently, the properties have proved difficult to sell, as the ground rent due per year will become disproportionately high over time and has therefore discouraged any potential purchasers.

 

Finally, British newspaper outlet, The Telegraph, ran a story which covered a leasehold flat in Islington whereby the ground rents starting at £250 per year, doubling every 25 years for 999 years, would grow over the 999-year lease term to an incredible £68,719,476,736,000 a year!

 

Is 2017 going to be a better year for leaseholders?

Unfortunately, several judicial and legislative developments in 2016 have made it increasingly difficult and costly for leaseholders to exercise their legal rights, and freeholders are expected to try and further their cause in 2017 by using lower interest rates as a smoke screen to mask their aspirations for higher profits.

 

In late 2016, we have already seen large freeholders begin trying to argue the case for lower capitalisation rates, which are used to calculate the ground rent due to a freeholder, in order to compensate for any loss of ground rent.

 

In addition, an even bigger battle appears to brewing over the deferment rate (‘Sportelli’, 2007). The deferment rate 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 will have to pay their freeholder. Rumours of informal discussions amongst freeholders throughout the country has caused a sense of apprehension and hysteria among the UK’s 4.1 million leaseholders. Any kind of reduction to the current rate of 5% would have huge financial consequences for leaseholders across the country.

 

Leaseholders look set to endure many battles in 2017, and freeholders are expected to pursue higher profits from lease extensions and ground rents wherever possible; irrespective of the negative effects that might have on property owners. Leaseholders can find some hope in the knowledge that with increased media coverage, the general public are becoming better informed and educated about leasehold abuses, and the debate on the ethical nature of leasehold properties is coming to the fore of parliamentary debate more and more often.

 

Nevertheless, the ominous situation regarding leasehold properties in the UK looks set to continue. Any pursuit for change must begin with leaseholders demanding that this one thousand-year-old feudal system is abolished from UK property law once and for all.

 

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