- Housebuilders have used a loophole in a 1987 law to avoid offering freehold rights to leasehold homeowners. The “perfectly legal” provision allows builders to sell the freehold rights to an “associated company” and later on to investors to extract rents from residents. Leasehold ground rents in some cases have increased sharply over time, generating millions in revenues.
LONDON – A few words in a law designed to protect homeowners appear to have been used by major housebuilders to sell off freehold rights to investors, leaving the ultimate ownership of flats in the hands of hidden investors.
The Landlord and Tenant Act 1987 was introduced to protect homeowners from soaring service charges and unfair leasehold practices.
It is so poorly written, however, that builders can use basic loopholes to skip legally around provisions which would give owner-tenants the chance to buy the freehold on their own homes outright.
So what’s the problem with the law?
The leasehold scandal
Historically, since the early 20th Century, most homes in England and Wales were sold as freeholds, whereby a buyer would take ownership of the home itself and the land it sits on.
That changed around the turn of the century when builders and landlords identified a new revenue stream. They started to sell houses and flats under leasehold agreements, then sell the freeholds to the land onto another investor.
Freeholds are valuable assets, because the owner typically levies an annual fee, called a ground rent, on the homeowner. Freeholds offer high annual yields – up to 10% of the purchase price annually in some instances. Ground rents can now cost the leasehold owner large amounts of money. The average charge now stands at £371 a year on new-builds and £327 on other properties, according to research by Direct Line for Business. Sometimes it can be a lot higher. When the government introduced proposals to ban the sale of new leaseholds in July, it cited the case of a family home which is unsellable because the ground rent will reach £10,000 a year by 2060, and a homeowner who was told she could buy the freehold from an investor for £2,000 but was forced to pay £40,000.
Sebastian O’Kelly, director of the charity Leasehold Knowledge, says up to 100,000 homes in the UK are “unsellable” because their owners will be forced to pay spiralling ground rents – in many instances, they are set to double every ten years.
Investors are exploiting a flaw in the law
The Landlord and Tenant Act 1987 gave leaseholders of flats the “right of first refusal” (RFR), which meant they were legally entitled to buy their freehold before the landlord sold it on to an investor.
There are several major flaws in the law, however. Firstly, it contained only provisions for leasehold owners of flats – not houses – because the vast majority of houses were sold under freehold at the time.
But it is now common practice for builders to sell new-build houses under leasehold: There are around 1.2 million leasehold houses in the UK.
“In my experience developers and non-developer landlords who were correctly advised were certainly circumventing the obligation to offer freeholds to leaseholders in this way.”
The second loophole relates to a clause in the law which makes exemptions for “associated companies.”
It works like this: Builders can register the freehold interests on a block of flats to an “associated company.” After a period of two years, the builder can sell the shares – and therefore the freehold interests – in that associated company to an investor. Under this arrangement, they are not obliged to offer the owner-tenants the Right of First Refusal, making it impossible for owners to buy their leaseholds and turn their properties into fully owned freeholds.
Business Insider’s review of Companies House records showed that at least two listed builders sold associated companies to a ground rent fund.
Companies House records show that on 14 July 2009, Persimmon Group (No 3) was registered as an associated company of Persimmon, a builder listed on the FTSE 100 index.
On November 19 2014, records show Persimmon Group (No 3) was re-named Adriatic Land 2. Its ownership – a single share – was transferred from Persimmon Homes Ltd to Adriatic Land 2 Ltd.
Adriatic Land is a ground rent fund, the ultimate ownership of which is unclear because its ownership is hidden behind the nominee directors private wealth management firm Sanne Group.
Adriatic is reportedly owned by one of the funds in the Long Harbour group, which is controlled by William Astor, the half-brother-in-law of former Prime Minister David Cameron.
Mutiple homeowners have reported having the ownership of freeholds on their homes transferred to the network of Adriatic Land companies without their prior knowledge.
Business Insider asked Persimmon if the associated company was registered for the purpose of selling freeholds without first offering tenants the Right of First Refusal, but it did not respond to a request for comment by the time of publication.
Companies House records also show that three companies – Seaton Group SPV 5, Bellway XI, and Bellway XII – were registered as associated companies of Bellway, a FTSE 250-listed builder, between April 2009 and April 2013.
They were subsequently re-named Adriatic Land Group 6 (GR1), Adriatic Land 3 (GR1), and Adriatic Land Group 4 (GR1), and their ownership was subsequently transferred to Adriatic Land.
Business Insider also asked Bellway if the associated company was registered for the purpose of selling freeholds without first offering tenants the Right of First Refusal, but it had not responded to a request for comment at the time of publication.
How widespread is the practice?
Emily Fitzpatrick is head of leasehold enfranchisement at Hart Brown solicitors, and represents leaseholders with claims over the freehold ownership of their property.
She told Business Insider that landlords had used the “perfectly legal” practice of setting up associated companies to avoid offering freeholds to leaseholders.
“In my experience developers and non-developer landlords who were correctly advised were certainly circumventing the obligation to offer freeholds to leaseholders in this way,” she said.
“It is a perfectly legal way to avoid having to offer the freehold of a block of flats which would otherwise qualify under the 1987 Act to the leaseholders before selling to a third party.”
Fitzpatrick still comes across instances of the practice, but says it has fallen out of favour with builders in favour of another method.
“I come across it from time to time but not as often as I used to,” she said.
“The most common means I now see is where a developers enters into a contract with a third party, often a regular ground rent investor, before any of the flats have been sold. This means when they come to complete the sale of the freehold to the third party, the Act does not apply because the developers are obliged to sell the freehold under a pre-existing contract.
“This is dealt with in section 4(2)(i) of the Act. Such a disposal is not a ‘relevant disposal’ for the purposes of the Act.”
It is very difficult for owners to assert their rights
A more recent law – the Leasehold Reform Housing and Urban Development Act 1993 – means flat owners do have the right to purchase the freehold from an investor by means of “collective enfranchisement,” but the process is subject to complex negotiations.
This can involve costly solicitors, and requires at least 50% of the tenants of a given building to agree to purchase the freehold, however. The value of the freehold is determined by haggling between solicitors representing both the freehold owner and the leasehold tenants.
Fitzpatrick said: “The loopholes in the Act could be easily closed by removing some of the situations where certain disposals are not caught. However, we must remember that leaseholders of blocks of flats can, in the majority of cases, exercise their right to collective enfranchisement under the provisions of the Leasehold Reform Housing and Urban Development Act 1993.”
Fitzpatrick said the Right of First Refusal law does not appear likely to change: “The recent consultation paper mentions the RFR but appears to rule out any extension of it to houses on the basis that it is easily circumvented. There does not appear to be any proposal to amend the Act itself so I do not think it is likely that it will be amended. I would be pleased to be proved wrong.”
Leasehold Knowledge’s Sebastian O’Kelly said a system by which the market value of the freehold is automatically determined as a multiple of the ground rent – as is the case in Scotland and Northern Ireland – would help solve the problem.