Taylor Wimpey’s doubling of leasehold ground rents has drawn attention to what could be a wider industry practice that has drawn increasing criticism from MPs and campaign groups as well as anguished homeowners
Amid national newspaper reports of a leasehold homes “scandal”, housebuilder Taylor Wimpey last month announced a fund to help affected customers, using measured language to propose a solution that addressed “understandable concerns” “in an appropriate and fair manner.” The City of London seemed to agree it had drawn an equitable line under the problem: the £130m write-down, equivalent to 3% of the value of the company, was accepted with barely a flicker of its share price.
However, for home purchasers unlucky enough to own a Taylor Wimpey leasehold house affected by the “scandal”, the announcement hasn’t drawn a line under their problems. In fact for those such as Linda Barnes, owner of a Taylor Wimpey-built house she purchased second hand in 2014, before concerns about leasehold houses surfaced, the offer means nothing – the company will only help those who bought direct from it.
The problem with Barnes’ home, as with many other leasehold houses sold by Taylor Wimpey between 2007 and 2011, is that the contract means that the ground rent charge – which for her and many other Taylor Wimpey house leaseholders is £295 a year – will double next year, and then again every decade until reaching £9,440 a year around the time she retires. It’s the equivalent of rising 7% each and every year – and she has no idea how she will afford it.
Mortgage lenders have started to withdraw support for houses with such leases, and Barnes has heard that some solicitors are now advising people not to buy them. Meanwhile, Barnes understands from others in the same situation that the new owner of the freehold, E&J Estates, is asking as much as £40,000-£55,000 from those seeking to solve the problem by buying the freehold back. “It’s just awful,” she says. “I thought I had our future mapped out. This is life-changing.
“I couldn’t sleep, I couldn’t eat when I found out. It’s the first thing I think about when I wake up in the morning, when I wake up at night. The stress is immeasurable.”
This testimony is typical of those caught on the wrong end of Taylor Wimpey’s “doubling” leases – as they have become known. But the firm is far from the only housebuilder to have sold houses as leaseholds in recent years. Other volume housebuilders, such as Bellway and Persimmon, have done the same – even if Bellway told Building this week it has not made use of doubling ground rent charges and there is no evidence Persimmon has either. Here Building uncovers evidence of at least one other major housebuilder, Countryside, making use of “doubling” leases. So, with political parties now pledging to clamp down on leasehold house sales, and legal action commencing from distraught home purchasers, what have housebuilders actually been doing, and can they really assume they’ve put the “leasehold scandal” behind them?
While there is nothing illegal in selling a house as a leasehold, many separate accounts from purchasers (see case study overleaf) have described a process which has left buyers feeling conned. For example, we were told by one purchaser who bought a Taylor Wimpey home that while they were made aware they were buying leasehold, Taylor Wimpey’s sales agents told them they would have the opportunity to buy the freehold for a few thousand pounds at a later date. We are also informed of a purchaser of a Countryside home whose solicitor failed to warn them fully of the implications of lease clauses. Instead of being offered the freehold at a later date, many developers have sold the freehold on to professional ground rent investment companies without prior notification.
“I haven’t wanted to talk about it with anyone,” says James Sharp, purchaser of a £250,000 house from Countryside at Stephenson Grove in Rainhill with a doubling lease. “I was getting sleepless nights and I’ve gone into my shell. This was supposed to be our daughter’s inheritance, But I had this horrible feeling I’d been fleeced and I was just so embarrassed.”
It’s the first thing I think about when I wake up in the morning, when I wake up at night. The stress is immeasurable
Linda Barnes, owner of Taylor Wimpey house
There is no evidence of any collusion or conspiracy that add up to illegal practice. For example, housebuilders commonly vet solicitors to form “recommended” panels, and this doesn’t necessarily mean there is a commercial relationship that generates a conflict of interest, let alone a conspiracy to mislead.
In addition, while freeholders of flats are obliged to offer leaseholders the opportunity to purchase leases before selling them on, this legislation does not apply to houses, and there are also a number of other exceptions to these rules which mean they can in practice be legally bypassed on freeholds for flats.
The Home Builders Federation (HBF), Taylor Wimpey and Countryside all point out that, via the conveyancing process, each buyer will have received independent legal advice. But while Taylor Wimpey maintains it has no legal obligation to do anything, it has also accepted that “the introduction of these doubling clauses was not consistent with our high standards of customer service.” Chief executive Pete Redfern told Building: “We’ve listened to the concerns and difficulties that some of our customers have faced [and] we are sorry for the worry this has caused them […] This is about doing what we think is right.”
Countryside however, while admitting to Building that it had used “doubling” leases in the past, said nevertheless it was not planning to take action to help customers who bought these houses. Chief executive Ian Sutcliffe told Building that the firm now ensured that, where possible, all houses were sold on a freehold basis, but added: “What we were doing was absolutely in line with industry practice at the time. We absolutely refute that people didn’t know what they were getting into. It was clear in the literature, and if they didn’t feel informed the question has to go back to their solicitor.”
He told Building he did not know how many homes the firm had sold under “doubling” leases but that he thought it was a practice on a “very small number of sites.”
Persimmon told Building it was conducting a review of its “historical leasehold sales” but that its preliminary conclusion was that its leasehold terms “should not give its buyers cause for concern”, and that there was never a commercial relationship between Persimmon and any solicitors acting for its customers.
It is not just leasehold houses sold with “doubling” ground rent clauses that are causing concern – the use of leasehold at all is a problem. Leasehold tenure goes back nearly a thousand years, with its many critics describing it as a “feudal” tenure which vests the freeholder with few responsibilities to the leaseholder – who technically “owns” nothing. A report by the HomeOwners Alliance, published last month, described leasehold, affecting 1.6 million households, as a “rotten system” that was “extorting millions of pounds from leaseholders every year.”
However, its traditional use in flatted developments serves a purpose to divide up responsibility for individual and common parts of a building, with ground rents and service charges making sense when the freeholder has maintenance obligations. But this logic is lost when leasehold tenure is used to sell whole houses. Mari Knowles, partner at advisory firm Leasehold Law, says: “A lease normally works on the basis of mutual benefit and burden, but in the context of houses there just isn’t this balance. It’s all burden for the leaseholder and no benefit.”
For leasehold campaigners, however, the issue is bigger still. Sebastian O’Kelly of the Leasehold Knowledge Partnership now confidently predicts the sale of leasehold houses will be banned whichever government is returned after 8 June, but says nothing short of total leasehold reform will do, with 43% of new home registrations now leaseholds. “The selling of houses as leasehold could easily be stopped – and will be stopped. But ultimately it’s minor compared to the number of leasehold flats out there which can be abused.”
Bellway, meanwhile, has told Building it continues to sell homes on a leasehold basis. In a statement to Building, Bellway said: “The benefit of us selling a home as leasehold is that by receiving an annual ground rent we are able to sell leasehold homes at a very competitive price and at a lower cost to the purchaser than a freehold sale.”
In relation to ground rents Bellway said: “After a period of eight years from the term commencement date the ground rent will increase in line with the retail prices index (RPI). Following this, it will increase by the rate of RPI every five years thereafter for the duration of the lease term. The reason for this is to ensure that the ground rent remains at the same value, in real terms, as at the time when the lease was granted. Unlike those stated recently in the press, it does not ‘double’.”
Aside from the ground rent, the leasehold contracts found in new-build houses often contain onerous conditions that charge occupiers hundreds of pounds for fitting new carpets, bringing in pets or building extensions. Mari Knowles, partner at advisory firm Leasehold Law, says “Even when the ground rent is linked to RPI inflation, you could argue that these properties would still be difficult to mortgage because of these burdens.”
The story of why housebuilders have sold houses as leaseholds has its roots in the credit crunch. With house prices falling, developers looked for other ways to make sites viable, at the same time as globally low interest rates pushed investors to seek new asset classes that could deliver better investment yields. This combination saw the massive expansion of freehold as an investment.
Land Registry figures compiled by campaign group the Leasehold Knowledge Partnership (LKP), show that the annual value of new leasehold houses sold more than tripled between 2010 and 2015 from just £616m to £1.97bn. It estimates that around 40,000 leasehold houses have now been built and sold in total and that developers are making between £300m-500m a year from the sale of freehold for leasehold properties – though housebuilders do not have to declare them.
One housebuilding source suggested the avenue was used to make challenging sites viable, and that “there are hundreds of homes that wouldn’t have been built but for this freehold market”. This view is supported by the HBF, which said in a statement that leasehold terms should be reasonable, but that any policy changes should “not reduce the supply of developable land and so threaten increases in the supply of desperately needed housing. The industry is committed to working with government to develop a way forward that is fair for consumers whilst continuing to support huge increases in housing supply.”
However, others suspect selling leaseholds to investors is just about profit. Berkeley Group, for example, said in its 2015 accounts that it sold a portfolio of 10,000 ground rent leases for £99.8m on all property types, on which its gross profit was £85.1m.
Sebastian O’Kelly, trustee at the Leasehold Knowledge Partnership, says: “There is no service provided in return for this ground rent. There is simply no reason to do this other than to attempt to create an asset class on the back of the property market. In doing so they’ve eroded the wealth of a generation of homeowners.”
Since Taylor Wimpey’s “doubling” leases were revealed in the autumn, housebuilders have been under growing public and political pressure. Following debates in parliament, Tory MP Peter Bottomley laid down an early day motion in parliament calling on Taylor Wimpey, Bellway, Persimmon and ground rent investor Adriatic Land to give their customers “fair, affordable enjoyment of their home” by “cancelling unaffordable ground rent terms.” A Facebook group entitled the “National Leasehold Campaign” set up to get redress for affected homeowners now has almost 4,000 members.
Housing minister Gavin Barwell has pledged action on the doubling leases issue, while communities secretary Sajid Javid told MPs last month he was minded to ban the selling of new houses under leasehold, and look at the issue of onerous terms more widely.
There is simply no reason to do this other than to attempt to create an asset class on the back of the property market
Sebastian O’Kelly, Leasehold Knowledge Partnership
The Labour Party’s manifesto also included a pledge to “end the routine use of leasehold houses in new developments.”
Last month the Council of Mortgage Lenders issued a statement acknowledging that “some lenders” were reviewing lending policies given concern about “onerous ground rent clauses.” Then, just two weeks ago, Nationwide became the first individual mortgage lender to say it would not lend on new-build homes with “unreasonable” ground rent clauses that doubled every “five, 10 or 15 years”, or were more than 0.1% of the value of the house.
It is not, however, clear where this pressure leaves either affected homeowners or housebuilders themselves. Taylor Wimpey customers have said its £130m Ground Rent Review Assistance Scheme, which promises to pay freehold owners to amend ground rent terms so that they rise in line with inflation, is opaque and compensates the ground rent investors, not them. It would also leave Taylor Wimpey customers with ground rent charges remaining far higher than the 0.1% of house value that Nationwide has now stipulated. LKP’s O’Kelly says that Taylor Wimpey should instead “offer these buyers the freeholds at the price originally quoted to them by sales executives.”
In addition, buyers of re-sold houses such as Linda Barnes remain completely without help from Taylor Wimpey, while the change of heart by mortgage lenders potentially leaves those who have already bought in an even more difficult position.
Advisers such as Louie Burns, managing director of Leasehold Solutions, are now advising affected leaseholders to club together to attempt to get redress via two routes: negotiating a reasonable price to buy back their freehold; and building a negligence claim against solicitors that failed to advise them of the dangers lurking in their leasehold contracts. Burns says the first professional negligence case, involving 175 properties, has just been launched, with “many more about to start.” However, he is also investigating further legal options – including a potential mass litigation against the housebuilders on the basis of the sales advice given to buyers: “if we could get thousands and thousands of people to sign statements.”
Housebuilders so far seem relatively unruffled, despite one MP, Justin Madders, describing this as potentially the “PPI of the housebuilding industry” – a reference to the misselling of insurance by banks which has now cost that sector a total of £37bn.
Chris Millington, analyst at Numis, says: “From what we know, Taylor Wimpey is the firm most exposed to this. Yes, there could be further financial liability to the sector, but not anything near the amount we’ve already seen.” However, Cenkos analyst Kevin Cammack argues the jury is still out on the long-term impact: “The unanswerable question is how far the bandwagon against this practice gets driven, and then what becomes defined as an onerous lease. The liability depends on where that consensus is reached.”
At the very least, following separate revelations about the build quality of Bovis Homes properties earlier in the year, housebuilder critics say the “scandal” calls in to question whether the sector’s biggest firms behave ethically, even when they behave lawfully.
Case study: A Taylor Wimpey leaseholder tells her story
Emma Conway, Heymont Estate, Heywood
House price: £163,000
Ground rent: £295 per annum, doubling in 2018 and then every 10 years until reaching £9,400 in 2058
Emma Conway bought her family house in 2009 under a shared equity deal just after having her second child, following an inheritance from the death of her grandmother. While she asked about buying the freehold at the time, she says Taylor Wimpey staff advised her “we had time to do that after we had bought” and that “it was best to use the money for the mortgage”.
However, a few years later the freehold was sold to ground rent investor E&J Estates without being first offered to her. She says she used her own solicitor, but that it didn’t pick up the doubling clause, only the starting yearly ground rent of £295.
“I have not slept properly worrying about what will happen if we can’t make the payments. I love my house but to have to effectively be a tenant in a property I have taken a mortgage out on is the worst experience ever. I have nothing to leave for my children and my pension will be used to pay their extortionate fees.”
Taylor Wimpey said in its statement to the City that it has now ended the practice of selling houses as leaseholds, but admitted freeholds had previously been sold on “in line with normal practice.” Chief executive Pete Redfern told Building: ““We are working hard with the freeholders to convert our customers’ doubling leases to ones that are significantly less expensive over the life of the leases and which resolve concerns around how easy it is to sell or get a mortgage on these properties.”