Patrick
Collinson
The Big Short ... highlighting greed in the banking and property market. Photograph: Everett/REX/Shutterstock
It beggars belief that there
can be clauses in a property contract which allow a freeholder to backdate the
ground rent and then present an extortionate bill to the unsuspecting buyer of
a flat. That we can run a story about Kadian Kennelly, who was expected to pay
ground rent of £8,000 a year, and as much as £8m in the future (yes, on her
one-bed flat), shows the staggering greed at the extreme end of this “market”.
But perhaps we can thank her freeholder for one thing: helping us to throw a
spotlight on a seedy practice for which there is no ethical basis.
Only in Britain do we persist
with an archaic form of property ownership that allows the rich to extract an
income out of hard-working homebuyers and provide absolutely nothing in return.
What’s more, rather than seeing this practice wither on the vine, it is,
astonishingly, actually getting worse.
Big housebuilders have spotted
an easy cash stream and are knocking out what would previously have been freehold
houses as leasehold – 6,000 last year, according to government figures. Usually
there is a spurious “common parts” to a new-build estate that gives an excuse
to the builder to say the property is leasehold. Ground rent is stuck in the
lease, to be ramped up later. The builder sells it on to rapacious investors
who can “securitise” the “revenue stream” from the rents. If you’ve watched the
Big Short on Netflix recently, you’ll know the game.
My brother was about to spend
around £250,000 on a leasehold flat until my sharp-eyed father spotted a
clause, in highly obtuse language, which enabled the freeholder to double the
ground rent every decade.
“Each review date the rent is
to be increased to double the rent reserved before the relevant review date and
the reserved reviewed rent will be payable from and including the relevant
review date.” This gobbledegook translates into: “We will stiff you for a 7%
annualised rise in the rent.”
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No wonder financiers love this
stuff. Bundle up loads of ground rents, create a fund effectively paying 7% and
you can sell it for twice the price you paid, because even a 3.5% yield is
attractive these days. And all for doing absolutely nothing. Ground rent is
almost the definition of a socially useless activity.
As campaigner Sebastian
O’Kelly of Leasehold Knowledge Partnership
says: “Freeholds represent 5% or less of the capital value of a block of flats
yet have a preponderance of the power. That does not make sense, even
capitalistically … a tough monetising property spiv should get a 20% annual
return on a freehold.”
Meanwhile, the buyer of the
apartment, who has probably used their life savings for the deposit and is
handing over nearly half their income to the mortgage company, doesn’t really
own the property. Legally, it can be forfeited if ground rent is not paid,
although thankfully that happens rarely. Far more common is the repulsive
squeeze put on homebuyers whose leases are less than 80 years – and there’s two
million of them in Britain – to pay absurd amounts to extend them, or see their
property become unsaleable. The winners, especially in London, are generally
the aristocratic estates to whom these unearned incomes flow.
The rest of the world (including
Scotland) has forms of commonhold: flat owners know they own the flat,
fractions of the corridors and roof and land, and are responsible for it.
Australia rejected leasehold in the 1960s, as have other parts of empire
saddled with this legacy of colonial rule.
The solution here? “New leases
should be indefinite; ground rent should be abolished; all flats should be
built with residents’ management companies, so the residents take control once
a majority of the flats are sold,” says O’Kelly.
French philosopher
Pierre-Joseph Proudhon famously coined the phrase “La propriété, c’est le vol”.
Maybe not all – but leasehold certainly is.
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