Unfair escalating house lease?
The background to this question:
‘There is an increasing awareness by pension funds and annuity funds of the attractive characteristics that come from ground rents and the associated cash flows. Not least there is an asymmetry in the returns available with a high degree of downside protection as well as the potential for upside (for example from increasing house price values over the long-term). This is combined with the apparent paradox of a gain (rather than a loss) in the unlikely event of there being a default.’ (Forfeiture of a house.) (Highlights are ours) … With the tightening of credit spreads that we have witnessed over the last 18 months to 2 years, ground rents represent an even more attractive risk-adjusted return relative to many other types of comparable, credit-based assets.
– MARK HERNE, MANAGING DIRECTOR AND INVESTMENT CONSULTANT AT REDINGTON, WRITING IN REDINGTON ASSET CLASS SPRING/SUMMER 2013. REDINGTON SIGNED AS ADVISOR TO TAYLOR WIMPEY PENSIONS IN 2016.
Seven Questions for the Housebuilders over Leasehold Escalation
Q1 – Do Britain’s housebuilders or their pension departments retain an interest in a house leasehold in some way after it is transferred by them to a third party?
Evidence: There are three areas of observation. Firstly, ground rent companies are on record as saying whenever they are persuaded to change their terms, normally from a lease doubler contract to an RPI lease, they frequently have to go back to their investors to agree the change. That suggests that the lease terms are somehow tightly coupled from investor to leaseholder. So the investor clearly invested in what looks like a Special Purpose Vehicle perhaps based on the total houses on the estate which wraps the lease into a discrete investment. The leaseholder pays the ground rent company who then pays the investor.
Second, ground rent companies promote their services principally to Defined Benefit pension funds, many in deficit, who are deeply concerned about rising pensioner payments. The mainstream builders sharply reversed the declining trend for leasehold around the time of the financial crash when it had been outlawed in Scotland, Northern Ireland, and most parts of the world, and pointedly created a vast number of house leaseholds in England and Wales against the trend.
Third, by observation it appears whenever a ground rent company is forced by adverse publicity to revert a lease doubler arrangement back to RPI, a builder appears to be very involved in the renegotiation, even in one case, Taylor Wimpey, offering £750 per leaseholder to pay for a deed of variation to amend the doubler clause(s) to RPI. There are a number of examples given below. Why, except for possible reputation concerns, should Taylor Wimpey be concerned at all if they had sold the leases on?
Q2 – Did Taylor Wimpey’s Pension Division increase their bond holdings by investing directly or indirectly in ground rent companies under the guidance of their pension consultant Redington in 2016?
Evidence: Redington and CBRE strongly promoted the benefits of an illiquid long term asset class based on ground rents that offered lower risk and noticeably higher returns to pension companies when compared with Government Bonds. House forfeiture on default (job loss, life events) was marketed as an attractive ingredient in the schemes.
Ground rents in short has become the crack cocaine of low risk high income investments for defined benefits schemes in deficit in this low interest rate environment.
The evidence showed that Redington strongly promoted ground rents from 2010 onwards, and CBRE did in 2013, winning a mention in Parliament for their coverage. In 2016, Redington were hired by Taylor Wimpey Pensions (in deficit) to restructure their pension, and Taylor Wimpey later announced to the regulators it has substantially increased its bondholdings. Did these include receipts from investing in ground rents originating from the leasehold house estates Taylor Wimpey actively created and sold?
Q3 – In the case of Adriatic Land v leasehold residents at Silver Birch Close in Bolton, where the leases had doubler terms, why did Taylor Wimpey offer to pay the residents £750 each to have the leases they sold to Adriatic Land varied to RPI leases, but keep them in place, if Taylor Wimpey or their pension division had no further financial interest themselves in the leases after selling them on?
Evidence: On the above question and Taylor Wimpey, there is nothing else to add to the question. But going further, in the case of Long Harbour v leaseholders, why did Taylor Wimpey also get involved in the agreement to vary lease doubler leases back to RPI if Taylor Wimpey or their pension division didn’t have a connected ongoing financial interest in the ground rent income from Long Harbour?
Taylor Wimpey told The Guardian’s Patrick Collinson on 5th November 2016:
“As a homebuilder, Taylor Wimpey’s core business does not include the management of freehold reversionary interests and so they are typically sold to third parties. Taylor Wimpey does not own the freehold [on —- (see article) development] and therefore does not benefit from the increases to ground rent or have a say in any associated charges.”
from: The ground rent scandal that is engulfing new home buyers
Here is evidence from an unrelated and unnamed case, see in particular item 3. If they are leading on negotiations, how can they not be financially interested in the outcome? And given Redington’s involvement with the Taylor Wimpey Pension Scheme earlier that year, (see further in text) and Redington specialised on ground rents from English and Welsh leases should this denial be challenged?:
Q4 – Persimmon ran several ground rent companies including Persimmon Group (No 3) from 14th July 2009 to November 19th 2014. It was transferred to Adriatic Land 2 Ltd. Clearly it benefited from selling escalator leases for 5 years. The question is, does Persimmon continue to have a direct or indirect financial interest in these leases?
Evidence: On the above question and Persimmon, there is nothing else to add to the question.The same question can be asked of Bellway, who had three companies — Seaton Group SPV 5 (SPV stands for Special Purpose (investment) Vehicle, a name often used in conjunction with the ground rent industry), Bellway XI, and Bellway XII — registered as associated companies of Bellway, for 4 years from April 2009. 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.
This question is amplified when Nationwide Building Society’s Pension department confirmed a £54m investment valuation in ground rents as highlighted by The Telegraph on 23rd May 2017 at: http://www.telegraph.co.uk/money/consumer-affairs/leasehold-rip-offs-nationwide-building-society-among-big-investors/
Previously PropertyWeek.com confirmed that in a single deal EcoWorld Ballymore had sold £60m of London Residential Ground Rents, generating £1.6m (2.67%) from 2,500 units per year to Nationwide pensions department (their funds are also in deficit) in December 2016, see: http://www.propertyweek.com/news/ecoworld-ballymore-sells-ground-rents-on-london-resi-schemes/5086817.article (regn required).
Q5 – Is the reason builders and lenders in the residential property market have been very quick indeed to assist ground rent companies vary their terms because they are very concerned, as Taylor Wimpey and Nationwide seem to be, that they do in fact maintain a direct or indirect financial interest in the ground rents they created, then claimed to have sold off, and have no wish to have this inconvenient finding brought into public view?
Evidence: Both Taylor Wimpey and Nationwide were very swift to act to deflect public attention on the lease doubler schemes. Taylor Wimpey announced a limited scheme to revert a number of lease doubler schemes to RPI, but again it should be noted that these had already been sold off, so why were they interested? Nationwide appear to hope that by calling out for law reform, and declining to lend on leased properties with the onerous terms, they might hope to deflect interest in their investments in ground rents from London estates.
Q6 – If it is shown that the builders are continuing to receive monies directly or indirectly from leaseholders after they transferred the leases from under the noses of the leaseholders, in addition to an abuse of trust, is this also an undeclared conflict of interest?
Evidence: There are many anecdotal stories in the media about buyers of the afflicted houses having housebuilder’s solicitors recommended to them, who were not at all clear to the buyers in discussions of the lease terms. There were also a number of stories of housebuilder salespeople actively avoiding questions about the leases, answering them to an unknown extent late in the day, placing pressure on buyers to sign in a short time, or making statements that leases were ‘virtual freehold’, so nothing to worry about. This was being done in the clear expectation that the builder, though possibly not the salesperson, was planning to prioritise selling the lease to a ground rents company at some time in the future over the interests of the leaseholder.
Many instances of this happening have also been anecdotally observed, and appears to us to be a conflict of interest between the builder and the leaseholder.
Given that there are now 400 claims being pursued at time of writing, it will not take long for the actuality of these claims to be revealed.
Q7 – Did the builders create the house leaseholds to get above average income returns to assist repair their pension fund deficits?
Evidence: Most of Britain’s large defined benefits pension funds, including a number of the large builders, are in deficit, that is, they are battling with having to pay out more to their pensioners than the funds are receiving from their company or via their other low risk investments. Figures as at October 2nd 2017 showed Taylor Wimpey’s deficit is £232.7m, Persimmon £81.2m deficit, and Barratt, Bellway, and Bovis have smaller deficits but are also smaller businesses. The ground rents asset class offers much higher returns than Government bonds, and both CBRE and Redington have promoted ground rent schemes to Britain’s top company pension trusts. The FTSE 100 list includes some of the builders.
What should be done about this?
HALO calls for The Communities and Local Government Committee to investigate house leasehold as a whole with a view to retrospectively dismantling it for the 110,000 afflicted homes, and in the nearer term, should certainly ask the UK major builders to attend and answer these questions about their possible involvement with the ground rent companies after the freeholds are transferred.
HALO notes that when the Parliamentary group for leasehold and commonhold reform requested the builders to assist them by answering questions on house leasehold on December 15th 2016, all declined to attend, and only Taylor Wimpey replied to issue a blanket denial.
It is more difficult to avoid a Parliamentary Committee, and most reluctant witnesses cave in and attend in the end.
“Committee can remind a reluctant witness of its power to summon. As such reminders are informal, they are not recorded. Committees seldom have to resort to a formal order to an individual to attend.” – HoC Briefing Paper 6208, Select committees: evidence and witnesses
The purpose of this blog post is to provide information about a new campaign group, HALO, or Houseowners Against Leasehold Oppression. It is being set up and run by a campaign steering group whose members are themselves victims of leaseholder oppression, with campaign facilitation managed by an experienced campaigning business called Make Public. We seek to replicate the styles and persuasive voices of the successful national WASPI and Equitable Life EMAG campaigning groups.
Time to fight back!
HALO – Houseowners Against Leasehold Oppression and Make Public
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