The Abuse of Leasehold Interests.
What should a valuer consider?
By Chris Rispin Managing Direction, BlueBox Partners
Leasehold remains the number one concern for homeowners in the UK. Recent research by DAC Beachcroft (international firm of lawyers specialising in advising the insurance industry) summarised the government’s thinking on leasehold interests following their recent consultation.
Although the findings of the consultation could mean that leasehold issues will be addressed for future market activity, there seems very little that can be done by people holding an existing leasehold property. Their only avenue remains seeking legal advice on whether they were badly advised at the start of the process.
While any rise in claims could stimulate work for those specialising in the valuation of leasehold interests in determining losses arising from an onerous lease term, this won’t resolve anything for the customer.
Valuations and true market value
When there are issues such as progressive movement or contaminated ground, the current response is to establish the facts before providing a valuation. This involves engaging an expert to investigate and determine whether any remedial action is required, who is responsible and at what cost. This is then used to assess the true market value.
So, where does this leave someone who owns a property with a perceived (or actual) onerous term and wants to sell or re-mortgage? The RICS (Royal Academy of Chartered Surveyors) have been silent on this so far, leaving valuers to decide how to advise their client. Which points should a valuer consider?
Points to consider
1. Reaching a point of certainty
As with any valuation, it is important to get to a point of certainty. This applies as much to lease terms that could affect value and saleability as it does to structural or site-related concerns.
If the process currently used for serious defects was applied to a lease with unknown terms, it would be immediately important to establish the facts before giving a value. Access to the terms of the lease should be standard practice at the time of the valuation. However, this is rarely the case and the lease terms are often left until shortly before exchange, resulting in timing issues. For new build properties these details should be disclosed along with the DIF (Disclosure of Incentive Form).
To highlight the need for change, here is a short case study regarding a purchaser who was in a chain of three. They were due to exchange contracts shortly. On the day of exchange, the purchaser found out that the ‘first-time buyers’ were actually the owners of a property but looking to let it out, so were unable to exchange.
This information had not been established by the conveyancers or estate agents at the outset, resulting in unnecessary delays and stress. This sort of incident is an obvious reason for the rise in online agents who are transparent in what they do and do not offer. This is far from an isolated incident in the housing transaction process.
Need for change:
While those in the residential property industry continue to sell cut down ‘valuation surveys’ and legal processes at unrealistically low prices, then situations like this will arise and frustrate the process.
In a properly conducted valuation, the valuer could receive a summary of the lease to scrutinise and incorporate it into the overall analysis. Determining whether the lease could affect the valuation at the outset would mitigate problems such as those described above.
2. Impact of ground rent
In a case with escalating ground rent, it should be for the valuer to determine the likely impact of this in the future. Escalation of the ground rent in accordance with RPI (Retail Price Index) may be reasonable, although it’s impossible to predict the average market in 50 years’ time.
While a valuer can’t predict the future, they can point out potential concerns and make reasonable, documented assumptions based on their market knowledge. It is then for the lender and buyer to decide whether to take that risk.
If there has been previous market activity based on similar terms, this could indicate the degree of risk, but this should not be tempered by knee-jerk reactions of some lenders who have put up the shutters to such risk.
Where more onerous terms are identified, and that will affect saleability both now and in future years, such cases should be referred back to solicitors to negotiate with the landlord for a variation in the lease terms. This isn’t an easy solution and it’s hoped that it will be addressed by the government’s proposals.
Is it possible that, given repeated referrals, Landlords will see the error of the situation (particularly if the property becomes un-mortgageable), and acquiesce to revised terms? It does depend on those involved in the decision-making process making clear that unacceptable lease provisions will not be tolerated.
What can owners do?
Owners hoping to re-mortgage having found the value of their property has been adversely affected by the lease terms have little choice but to seek legal advice on whether this loss was foreseeable at the time of the original purchase.
If the potential for such a loss has been missed by one of the parties involved in the transaction, they may have failed in their duty of care. Valuers in such a situation should address the situation, ideally with the support of the original lender and conveyancer. This would be the fairest approach for the customer.
Many situations have a logical process that can achieve a fair solution to all involved but this often doesn’t fit our super-fast ‘get an answer instantly’ world. Nevertheless, professionals should resist attempts to cut corners that could lead to them being labelled as the scape-goat.