Addressing the 2016 LEASE Annual Conference yesterday (2 February 2016), Louie Burns, Managing Director of Leasehold Solutions, laid bare the very real dangers of informal lease extensions.
Speaking to more than 250 leaseholders, valuers, property managers and lawyers, Louie Burns argued that, despite statutory provisions for legal lease extensions, many of the UK’s 4.1 million* leasehold flat owners are still being duped into informal deals by predatory freeholders, whose only goal is to extract as much money as possible. In an at-times controversial presentation, he outlined the threat that these deals pose, not only to leaseholders who fall foul of “dirty tricks” and underhand tactics employed by some unscrupulous freeholders, but also to professionals, operating in the sector, who advocate such informal deals to clients.
‘Trojan horse’ lease extensions
Louie Burns said: “At first glance informal lease extensions are designed to make it look like the leaseholder is getting a great deal, but nothing could be further from the truth. There are many dangers in accepting informal lease extensions, not least the actions taken by freeholders to hide the true cost of the agreement. I call these informal lease extensions ‘Trojan horse offers’; they look like a gift but when you look inside, the details can be catastrophic.
“Over the years I’ve seen every dirty trick under the sun from freeholders, whose only concern is to extract more money from flat owners. Freeholders often claim that an informal lease extension will save the leaseholder money, but by inserting clauses such as onerous ground rent schedules (which often double every decade), increased licence fees and service charges, and delaying tactics, not to mention the cost of the lease extension itself, leaseholders often end up paying £10,000s, if not £100,000s, more over the years than if they’d opted for the legal, statutory route.”
Leaseholders have a legal right to extend their lease by an additional 90 years and reduce the ground rent to zero if they have owned their flat for more than two years. The law provides compensation to the freeholder when the lease is extended, using a calculation based on the ground rent, reversion fee and marriage value** (whereby the freeholder is entitled to half of the increase in the value of the property when a lease with less than 80 years remaining is extended).
Informal agreements, by contrast, are not protected by the law and the freeholder can make any changes they want to the terms of the lease, such as only extending the lease back up to 99 years, which means the leaseholder must look to extend the lease again in the next 20 years to avoid losing considerable capital.
Freeholders often include other clauses within informal lease extensions, such as those covering index-linked ground rent, which double every five or 10 years, and provisions for the full legal fees of the freeholder to be covered by the leaseholder during any court dispute.
Legislative noose tightening on loop holes
Louie Burns continued: “With recent changes in legislation, such as the Disclosures Act 2014 and Consumer Rights Act 2015, the noose is tightening on the loop holes that enable informal lease arrangements, but many flat owners are still unaware of their rights and, when it comes to leasehold law, the devil is very much in the detail.
“Indeed, many valuers and solicitors are not acting in accordance with their responsibilities under the law, which is of grave concern to owners of leasehold properties in the UK. I see so many flat owners’ sales fall through because someone has not understood the implications of the informal lease extension offered, and flats can even become unsellable due to oppressive ground rent clauses and service charges resulting from informal arrangements.”
Thanks to the Disclosures Act 2014, agents and owners of property now have a very clear legal responsibility to report any facts that relate to their property, including informal lease arrangements; this is a significant shift from the traditional consumer law concept of ‘buyer beware’. The Act puts the onus on the seller and their agents to disclose any information that is likely to have an impact on the value of a property or the buyer’s enjoyment of the property.
The Consumer Rights Act 2015*** makes complete transparency a legal obligation, so those selling flats are now required by law to disclose all details pertaining to informal leasehold arrangements.
Louie Burns concluded: “Leasehold enfranchisement can be a complex issue to deal with, but the choice open to flat owners is remarkably simple: either they seek a legal, statutory lease extension or they opt for an informal, non-statutory extension put forward by greedy and unscrupulous freeholders, which could end up costing them £100,000s, with no legal recourse. I would only ever advise a flat owner to pursue a statutory lease extension, and to avoid any informal offers like the plague.”
