Beware the small print that could hike one-bed flat’s ground rent to £8m-a-year
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Version 0 of 1. You’ve just bought your first flat, and were told by your solicitor that the ground rent is £250 a year. So, on moving in, you are staggered to be presented with a bill for £8,000 a year. But that’s not the end of the nightmare. In the small print of the lease is a tortuously worded clause stating that this will double every 10 years, so that in 35 years it will have soared to £128,000, and in 95 years it will be £8m – for a one-bed flat that you bought for £58,000. This scenario might sound like fanciful nonsense but, incredibly, it is the real-life situation faced by Kadian Kennelly, who bought the flat a year ago. Kennelly told Guardian Money it is “simply scandalous”. And she is not alone: several other people who own leasehold flats in the same building are affected, with others scattered around the country. Unusually, the man said to be behind these outrageous charges was recently “outed” in parliament by veteran Tory MP Sir Peter Bottomley. During a Commons debate in May, the MP said property company boss Martin Paine was changing the terms of leases – for example, doubling the ground rent every 10 years, and backdating this change – in such a way that the flats ended up being “worthless”. However, Paine insists the terms were always openly negotiated with the tenants’ solicitors. Bottomley told MPs that “the greatest difficulty comes from the way the lease is written, as lawyers do not normally spot that the ground rent has been doubled back to the time when the lease was originally granted”. He said his understanding was that sometimes Paine would offer to buy the property back. However, he said Paine sometimes appeared to remarket a property “without drawing the attention of the potential auctioneers or the potential purchasers to what those buying it will be letting themselves in for. It is not for me to judge whether that is criminal, but doing this on an organised basis certainly demands attention”. The MP said he was asking the relevant authorities “or the police” to intervene. Kennelly’s flat is in Blythe Court, a 1960s development in Coleshill, near Birmingham – but to properly understand what’s been going on we need to spool back a couple of years. In February 2011, solicitors acting for a previous owner of the flat who had died agreed to a request for a deed of variation to extend the lease term by 99 years, according to the Leasehold Knowledge Partnership, a charity which provides advice to leaseholders and has been investigating this issue. But also hidden in the document was a clause that meant this extension did not, as one might have assumed, start from 2011, but from 1961, when Blythe Court was built. The lease variation also doubled the ground rent every 10 years from an initial £250 in 1961. The first person to buy the flat following the deed of variation was Michael Herring, who paid £85,000 in February 2011. He bought it as an investment using an insurance payout following a car accident which had meant he was no longer able to work as a scaffolder. His understanding was that the ground rent was a few hundred pounds at most – so he was stunned to receive a demand for £8,000. Herring, 52, told Money that his solicitors “had overlooked the small print that Mr Paine had put in,” and he later received a five-figure compensation payout. However, he had been advised not to pay the £8,000, which led to him being issued with a county court judgment for non-payment. In the end, says Herring, he sold the flat to one of Paine’s companies for around £30,000 after deciding that he just wanted to get rid of it and cut his losses. “I just about broke even. I put it down to a bad loss,” says Herring, who lives in Nuneaton. According to Leasehold Knowledge Partnership, in April 2015 the flat sold at auction for £72,000, but this buyer “evidently decided to get out quick” because it was soon on sale again. In October 2015, Kennelly bought it for £58,000. The 35-year-old social worker says she was told by her conveyancers that the ground rent was £250 a year. Just like Herring, she promptly received a demand for £8,000. Kennelly told Money: “What [Paine] was doing was really cunning. It was a ploy ... if you can’t afford it, the only other thing would be to forfeit the property and hand it back.” Kennelly is still living in the flat but says: “I tend to stay away because it’s filled with awful memories.” She adds that the one sliver of semi-good news is that, for the time being, Paine “has agreed to put a hold on [the £8,000 a year bill] until an agreement is reached”. Bottomley’s decision to name Paine was not the first time he had intervened on this issue: in January this year he tabled an early day motion requesting that flat 1, Blythe Court – in the same development as Kennelly’s – be withdrawn from an upcoming auction. He also asked the auctioneers to “refer the sellers to the appropriate authorities for withholding essential information of penal ground rent provisions that make the premises worthless”. That piqued the interest of law firm Hogan Lovells, which obtained a copy of the lease. In a blog headlined “Beware the hidden costs of ground rents,” it said the ground rent wording was introduced in 2014 by a deed of variation. “The initial £250 ground rent is backdated to 1961 and doubles every 10 years. Since 1961, it has doubled five times and is now £8,000 a year ... This compounding means that in 2021 the rent will increase to £16,000, and by the end of the lease it will be over £8m.” Mari Knowles, managing partner at Croydon-based specialist law firm Leasehold Law, is representing a number of affected leaseholders across the country. So what do we know about Paine? He owns a number of companies including Cheltenham-based Circle Residential Management, which manages leasehold properties. On its website the company says that following concerns raised by Blythe Court residents it had “agreed to a dialogue with leaseholders regarding payment of their ground rent”. It adds: “While the terms of the lease at Blythe Court are not uncommon, we understand the need for a more ethical approach to charges, in line with our company philosophy.” In a statement, Circle Residential Management told us: “We want to resolve matters at Blythe Court, working with our tenants to achieve a way forward. Circle has always tried to act with the best of intentions and integrity. “That has included taking legal advice in relation to leaseholds and ground rent because, like any company, we need to comply with the law. Circle also worked with tenants’ solicitors to try to ensure they advised their clients before any agreements were made with them. You cannot informally rewrite a lease – the terms were always openly negotiated with the tenants’ solicitors and approved by them.” What leasehold means If the property you are buying is leasehold (most flats are), it means the land it stands on is not part of the sale. You have to pay ground rent to the owner of the land, who is the freeholder. The My Property Guide website says that generally the rent will be “quite low”, adding: “It can vary from lease to lease. Some modern flats may have ground rents of £200 to £300 per year, while many ex-local authority flats may have a ground rent as low as £10 per year.” The site adds that in a typical 99-year lease, it might be set at £50 a year for the first 33 years, then £100 a year for the next 33 years, then £150 a year for the final 33 years. Mari Knowles, partner at Croydon-based Leasehold Law, says: “Leaseholders have a statutory right to extend their leases, whereby the ground rents will be reduced to a “peppercorn”. Quite often, however, the freeholder and leaseholder will agree an informal lease extension between them. This can happen where, for example, the leaseholder is trying to sell and needs to extend their lease in a hurry. “Where the parties agree an informal lease extension there is nothing to stop a freeholder demanding onerous terms (including high ground rents) and adopting a “take it or leave it” attitude. Sellers feel like they have no choice due to time constraints, and are often not made aware of their statutory rights. Unfortunately, outgoing leaseholders don’t have an interest in what the terms are as they are selling and won’t be stuck with the problem.” |