One of Britain’s richest men, the Duke of Westminster, could see the value of his estates plummet this week if a landmark legal challenge is successful. The case could also benefit 2m households across England and Wales.
The court of appeal will on Tuesday rule in the case of Mundy v the Sloane Stanley Estate in a long-running legal battle over the calculation basis for extending a lease.
If the ruling goes in favour of Mundy, it will send shockwaves through the property industry, slicing as much as half off the cost of extending a lease or buying a freehold.
There are estimated to be 2.1m homes in England and Wales where the leases have less than 80 years remaining, with 490,000 in London alone. The cost of extending the leases back to 99 or 125 years could fall by an average of 31% if the legal challenge succeeds.
What are leasehold houses?
Britain has had leasehold homes for hundreds of years, but only in the past few months has the ground rent scandal exploded. Now the government is proposing a complete ban on new houses sold as leasehold, and reducing ground rents to zero. Traditionally, houses have been sold as freehold, and the buyer has complete control over their property. When a house is sold as leasehold, the buyer is effectively only a tenant with a very long term rental, with the ground the home is built on remaining in the hands of the freeholder. The home buyer has to pay an annual “ground rent” to the freeholder, and has to ask the freeholder for consent if they want to make any changes to the property, such as building a conservatory or changing the windows.
Why have they suddenly become such a problem?
In the past, leasehold property owners were generally charged just a “peppercorn” ground rent, sometimes as little as £1 a year, and many freeholders did not bother to collect it. But the picture changed earlier this century, when developers started to insert clauses into leasehold contracts where the ground rent was set at £200-£400 a year, doubling every ten years. Direct Line estimates the typical ground rent to be currently £371. Although unsuspecting first-time buyers were frequently told that 999-year leases were “virtually freehold”, the clauses meant that the ground rent would soon spiral to absurd levels. The government quotes a family house where the ground rent is expected to hit £10,000 a year by 2060.
How many people are affected?
The Leasehold Knowledge Partnership, which has vigorously campaigned on this issue, estimates that around 100,000 homebuyers are trapped in contracts with spiralling ground rents. There are many more people in leasehold flats, some of which also have doubling ground rents.
Is it just the ground rent that is the issue?
No. Freeholders are able to extract other sums out of their leaseholders in a variety of ways. Homebuyers report being charged £100 even to have a letter answered by the freeholder, and as much as £2,500 for permission to build a conservatory. These are charges that are on top of obtaining planning permission.
The case involves a small flat in Chelsea where the lease has fallen to under 23 years, and where the freeholder is seeking £420,000 to agree an extension.
Behind the case is the surveyor James Wyatt, who is challenging a system of lease valuation commissioned on behalf of the Duke of Westminster more than 20 years ago.
The duke’s Grosvenor estate in central London includes the freeholds to some of the most expensive property in the world, making the current duke, Hugh Grosvenor, 26, one of the richest men in Britain with a fortune estimated at £9.5bn.
At issue are the so-called “relativity graphs” used by property experts that set the value of short leases relative to the freehold. Wyatt said: “In 1996 the Grosvenor estate commissioned [the surveying firms] Gerald Eve and John D Wood to draw up graphs of relativity to set the price for lease extensions and buying freeholds. No one has had the time, effort or money to challenge them since. It’s a much bigger scandal than the ground rents issue, and a real David and Goliath battle.”
Wyatt was formerly head of valuations at John D Wood but left to set up his own consultancy, Parthenia Valuation. He argues that the mathematical models currently in use wrongly award too much to the freeholder.
“The big London estates will be particularly hit, but it’s not just about the London market. I hear from lots of people, many of them pensioners, who are trapped in declining leases and can’t afford to extend them. For example, I know one where the lease extension should be £30,000 but the freeholders want £50,000 and the pensioners can’t afford it,” he said.
Wyatt estimates that leaseholders are currently being overcharged by £480m a year but claims that a “gravy train” of surveyors and solicitors are earning huge fees maintaining the existing system.
The legal challenge pitches Wyatt against some of the most powerful property interests in Britain. Wealthy freeholders likely to be affected by changes to valuations, whose estates are frequently derived from aristocratic land ownership, include the Cadogan estates (around Sloane Square), the Ilchester estates (Holland Park), the Howard de Walden estate (92 acres around Marylebone), the John Lyon estate (St John’s Wood and Maida Vale) and the Sloane Stanley estate named in the court case, which owns land around King’s Road and Fulham Road in Chelsea.
Some large freeholders are also major charities, such as the Wellcome Trust, which is a big landowner around South Kensington and uses surpluses to invest in cancer research.
Jo Darbyshire, of the National Leasehold Campaign, said: “The Mundy case is a landmark moment in leasehold reform. If the appeal is successful all leaseholders will benefit by being able to pay less for lease extensions and freehold purchases.
“Over the last 12 months the National Leasehold Campaign has been pushing for reform to leasehold law and an end to the leasehold scandal. It’s time to see if the establishment are ready to listen to a logical, balanced argument and level the playing field for leaseholders.”
If the Mundy case goes in favour of the leaseholder, it is expected to go to the supreme court on appeal.
However, even if the case is unsuccessful, leasehold valuations are expected to fall after a government review into the sector.
In December the Department for Communities and Local Government said it woud be “working with the Law Commission to make the process of purchasing a freehold or extending a lease much easier, faster and cheaper”.
The valuation model proposed by Parthenia Valuations is understood to be among those being considered in the department’s reform.
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