Lewis Rolfe
“Tulsesense Limited was formed in 1985 by my grandfather and his brother. Essentially, they were two working class builders who worked extremely long hours, 7 days a week. After many years of hard manual labour, they used their spare cash to invest in property within Tulsesense Ltd. They continued their manual work, while managing Tulsesense in the evenings, after a long day’s hard work.
Any profits the company made, were invested to purchase more investment. Tulsesense Limited has always been managed as a family run business and continues to be managed in that manner. We own relativity small portfolio of freehold ground rents. We are certainly not a large corporation, and the proposed bill will have a significant impact on our employees, as well as future generations.
In 2011, based on the price set out by a valuation conducted by Savills and a rival third party offer from a large ground rent investor, my family effectively purchased our grandfather’s brother’s family’s share in Tulsesense Limited. That purchase value was based on a valuation in accordance with existing legislation i.e. the right to receive ground rent in accordance with the properties’ leases, Marriage Value etc., should the leases be extended or enfranchised, the right to be paid the freeholder’s valuation and legal costs on enfranchisement and extending the properties’ leases. The price paid was fully financed by debt i.e. a bank loan and shareholder loans. To enable those loans to be put in place, significant costs were spent on due diligence, bank arrangement fees and other advisors’ fees. The proposed legislations changes have rendered that valuation redundant, and the portfolio’s value has significantly decreased. For the last 15 years, we have been servicing that debt, and, until very recently, no dividends had been paid to any shareholder. We are certainty not a large wealthy organisation or land-owning estate.
Like us, many Freeholders will have secured loans against that income. Any loan will need to be repaid regardless of any change in legislation affecting income. Should income be reduced or extinguished, the mortgage covenants are likely to be breached, with further bank costs being incurred, increasing the sum owed and the “calling in’ of that loan. Should that loan be secured against personal guarantees, this is likely to lead to owners losing their homes and becoming bankrupt. This will obviously impact the ability to pay staff, shareholders and directors’ income and pensions. Those individuals’ futures are tied to the business’ success. Any Freeholder collapse will affect their leaseholders, the management of those properties, the leaseholders’ ability to sell their properties, work required under the BSA etc…
What is being proposed is effectively the UK government saying, “even though you have worked hard, paid taxes, acted legally etc, we don’t like the car, the house etc you own, so we are going to take that from you and give it to someone else, and will not provide any compensation”. What next? What message does that send to any investor, foreign or otherwise, who works hard, takes risks, provides employment, pays taxes etc. and is the engine room of any economy?
We were encouraged to purchase perfectly legal assets, with the price effectively set by Government legislation. This is the single greatest intervention into private contracts ever proposed by the UK government with losses to investors of between £10bn and £40bn, for the proposed ground cap alone, depending on final legislation passed.
The proposed legislative changes have arisen from the negative publicity arising from a very small number of poorly drafted leases. The reaction to this has been both reckless and disproportionate which has caused a considerable loss of value to Freeholders and Leaseholders when there was no real issue with most leases. At the point of purchasing a leasehold, there is a contract between the Freeholder and Leaseholder. Despite this, it appears the Government wishes to undermine that contract through retrospective action via statutory intervention.
To enable our leaseholders to extend their leases for a premium lower than the statutory premium, we have agreed lease numerous extensions for lower premiums than the statutory premium, while retaining the ground rent. This further evidences the agreed premium combines two elements; the initial premium and the right to receive ground rent in accordance with the lease terms.
Prior to a Leaseholder purchasing the leasehold title, they would have employed Conveyancers to review the terms of their lease and provide advice. Reasonable ground rent provisions are not an unfair contract term. Where ground rents were perceived to be excessive, leaseholders would have had the right to act against those valuers and/or conveyancers who acted negligently. If the correct advice was not provided at the time of their purchase, that is a matter between the Leaseholder and their advisors. Much like us, many ground rent investors were not created by their current owners and were acquired in good faith. We do not understand why the Freeholder is being held liable for the poor advice leaseholders were provided by their advisors. If the leaseholders’ advisors acted negligently and the advice they provided at the time of purchase was defective, surely, much like other financial mis selling i.e. Payment Protection Plan Insurance etc., the advisors should be held responsible and not the freeholder.
Freedom of contract no longer appears “to be King”. The bill, and the prospect of capping ground rent is a retrospective re-writing of the agreement struck between two consenting parties by statutory intervention. Much like living in a communist state.
One point of common sense seems to be missing from the Government’s thinking. At the point when the buyer (say) of a new flat acquired it, they were presented with a commercial bargain namely to pay a premium for perhaps a 125-year term and to pay a ground rent on top for whatever amount might have been acceptable. In an open market, the tenant will adjust its bid on the premium (downwards) if it considers the ground rent makes the overall deal unpalatable. Equally, the Developer would have worked up its development appraisal to reflect a total outlay and return. For the return, both the premium and the entitlement to receive ground rent will be components. With no ground rent, the Freeholder seller would have asked for a larger premium to sell the flat. It cannot be correct, where one part of the consideration paid for a flat is treated as cancelled, perhaps years after the bargain was agreed. It is therefore odd to see ground rents being treated as a “free extra” benefiting residential investors, when quite the contrary is the case. There is no mention of any right for the Freeholder to revisit the original bargain and claim an addition to the purchase price, or to put it another way, to be compensated for what they have lost.
A price can be a mixture of immediate and deferred consideration. Someone who was employed by Government departments and many businesses, on the commencement of their employment agreed a salary together with an inflation-proofed pension and final salary pension. i.e. immediate compensation in the form of their salary and a deferred element when they retire. Both combined is the consideration for their services. Would it be correct to withdraw their pension because it is decided the employer was not happy with the deal. That would be outrageous, because the deferred element was part of their compensation for the consideration for their services. How can removing or reducing a former employee's pension be any different from capping the deferred element the purchase price for a leasehold property i.e. the payment of ground rent.
Ground rents are not linked to the provision of management services. On reading of any property lease, ground rent has nothing to do with service charges. The lease details the party (sometimes the landlord, but often not) who is obliged to carry out management of the whole property. In return for those services, the leaseholders pay a service charge to the party responsible for that management obligation. However, the payment of ground rent, is part of the consideration agreed when the lease was granted and is clearly defined in the property’s leases. It is not hidden. It is a clear commitment to pay that ground rent throughout the term of the lease.
The BSA defines the Freeholder’s value at the Relevant Date. However, that value would have included the right to receive the ground rent income and the value of its assets calculated in accordance with the legislation that existed at that time e.g. the right to receive marriage value if the lease were extended or enfranchised. However, the proposal to cap ground rent, and other such measures in the bill, attacks that value at the Relevant Date. If that same value were ascertained in accordance with the proposal and other recent proposed legislation, that value would be significantly less, and on that basis, the leaseholder may not be entitled to leaseholder protection. While the Freeholder at the Relevant Date, maybe obligated to contribute to rectify defective buildings/cladding, if the right to receive ground rent income from its leases is significantly reduced, and other attacks on Freeholder’s income, from where are the finances to be generated to do so, if the Freeholder’s value is undermined and their right to receive income reduced/removed. The bill seeks to undermine the assets value at the Relevant Date, while increasing the Freeholder’s costs to deal with Act. While driving many Freeholders out of business, the bill will seriously affect any remedial works to be undertaken under the BSA.
A considerable number of lessees are themselves non-resident investors (approximately 40% of our portfolio). A ground rent cap is robbing one class of investor to pay for a windfall to another investor. Any non-resident leaseholder should be outside the provisions of the bill.
Institutional Freeholders would be particularly affected by a ground rent cap. Their ground rents tend to be newer and higher per unit. Losses to these owners could affect thousands of pensioners.
There is no merit in granting windfalls to high-net-worth individuals e.g. Ground rents of £100,000 per year are common on Crown Estates. Ground rents on flats in central London of many thousands of pounds per year are common, however even at that level, are less than 0.1% of the leasehold’s interest’s value.”