“Why did no one senior at the company say, ‘This will come back to haunt us’?”
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Fallout from he UK’s ground rents scandal, which we reported on a week ago, is beginning to take a financial toll on some of the companies most implicated in it. That includes the country’s third largest home builder, Taylor Wimpey, which took a 24% hit to first-half profits after setting aside £130 million ($170 million) to help home buyers affected by the leasehold scandal. The government is investigating. Depending on how new legislation and pending lawsuits pan out, the company could end up owing a whole lot more.
Leaseholds have been around in the UK for centuries and are commonly used for apartment buildings, where there’s some semblance of shared land and building use. When a house is purchased as a leasehold, the buyer, knowingly or not, is really no more than a tenant, albeit one with a tenancy agreement that can last up to a century or more. The freehold — the building as well as the land the property occupies — belongs to somebody else, usually the builder that sold the property, or an investment firm.
This archaic arrangement didn’t used to be much of a problem as the annual payments leaseholders had to make to the freeholder were tiny. Sometimes they weren’t even worth collecting. But in recent years, the terms of the leases have become increasingly onerous, with higher initial rents that can then double every 10 to 20 years over the duration of the lease.
Taylor & Wimpey was one of the biggest offenders, though it quickly sold many of its freeholds to third-party investors attracted by the rising income they provide. Another popular draw of today’s generation of freehold agreements are the iron-clad guarantees they provide investors, as London-based real estate firms Savills pointed out in a 2012 report:
Because the ground rent is usually a nominal sum, the leaseholder is incentivised to pay under the threat of losing their property if they fail to do so and therefore the risk of default is minimal… In the event of a leaseholder default, the leaseholder’s mortgagee (i.e. the bank) will typically pay to avoid forfeiting their security and should there be further default, the freeholder has the right to forfeit the lease and gain vacant possession of the property. Default is therefore extremely rare.
For years Taylor Wimpey brushed aside public concern and criticism about its practices, even as soaring ground fees trapped its customers in homes they couldn’t sell or renovate without shelling out thousands of pounds in usurious fees to a faceless management company. Many of these customers complain they were never told by the company or the lawyers it kindly recommended to them that the ground rents would double every ten years.
Now that the UK government has pledged to outlaw leaseholds on new-build houses while drastically restricting ground rents for apartments to a “peppercorn” value, the company has finally decided to make up for some of the damage it has caused — presumably not out of moral imperative but rather from the belated realization that screwing over a large portion of one’s customer base in a very public way does not make for a sustainable long-term business model.
This is especially the case, given that 45% of Taylor Wimpey’s business depends on tax funds through the government’s lavish Help to Buy Scheme, by which taxpayers help
developers sell new-build homes to first-time buyers first-timers buy new-build homes.
The question now is why it took so long for the company to act. More to the point, as the consumer group Leasehold Knowledge Partnership posits, “How on earth did the selling of homes with exponentially rising ground rents seem like a good idea? Why did no one senior at the company say, ‘This will come back to haunt us’?”
The short answer can be summed up in four words: greed, impunity and opportunity. As the land economist Stephen Hill writes in The Guardian, the ground rents scandal exemplifies how normal it has become for many of today’s global businesses and investors to expect to “earn” totally exploitative rewards, without risk or commensurate investment:
This is just more evidence of the damaging commodification of land, and how, since financial deregulation, global capital flows graze effortlessly on our local housing markets for the risk-free excess profits they so willingly give up.
The result in the UK is that many of the young families that were given a leg-up to the first rung of the property ladder by very generous public subsidies are now stranded there with little or no hope of reaching the second rung.
For the builders and developers that made huge profits off this scheme, the blowback may have only just begun. As the investment firm Shore Capital warns, if there is broader, substantial reform of leaseholds, not only would a stream of profit for the households be eliminated going forward, there could be potentially high costs for restitution or compensation related to historic home sales:
In the round, this could become a material drag on sector profits and free cash generation. We believe all house builders are under a substantial but largely unacknowledged threat here and this adds another risk to investment in the sector.
Investors already appear to have taken heed, with the result that the three biggest sliders on the FTSE 100 on Friday were the giant home builders Barratt (-4.3%), Persimmon (-3.8%) and Taylor Wimpey (-3.5%). By Don Quijones.
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*albeit one with a tenancy agreement that can last up to a century or more*
So is a legal scam. In some countries if you have rented the same place for decades and you can prove you been paying ALL the taxes of the place for at least two decades, you can sue to get ownership of the property.
Sounds like adverse possession – but the possession has to be “adverse.” If you’ve paid rent to someone all those years, your possession may have been open, actual, and for the requisite number of years (and paid the taxes in jurisdictions where this is a requirement) – but it wasn’t “adverse” because you were paying rent under an agreement with someone.
Now if you squat in a home that the bank repossessed, but never really foreclosed on – your possession would be adverse.
“Leaseholds have been around in the UK for centuries”
But not in other countries. I’m assuming this is because other countries have found an even better scam — condos!
Please read up on condominium structure and ownership. The common elements of a condominium are held in corporation for the unit owners. Can a condominium exist all or in part on a leasehold? Yes. Are all condominiums leasehold? No. The same can be said of many real estate developments, from single family homes to manufacturing plants to office buildings.
Notably Rockefeller Center was a land lease for many years.
I’m dying laughing that one of the main players in this financial/ethical cow-pie is named “Taylor Wimpey”.
In the UK we can’t take seriously the two main mortgage companies in the USA are called Fannie Mae and Freddy Mac.
As for the Building Companies such as ‘Taylor Wimpey’ it is about time they’re brought to book. Not just this leasehold issue which has been going on. All the Building Companies in the UK have huge ‘land banks’ which they hold onto without building so to drive up the house prices and make more money.
What is ownership? Essentially, every “homeowner” in the US, “rents” from the local government that assesses property taxes. Failure to pay, eventually results in a lien against the real estate, or even the forced sale of the property. Property taxes, generally rise every year. There doesn’t seem to be much difference between “fee simple” and leasehold, no?
Leasehold is paying more than just taxes and basically the equivalent of renting only worse. If you lease you can’t improve the house or sell it. And the initial big investment means you can’t just move somewhere else.
Would you want to pay property taxes PLUS the rent to the freeholder?
On a side note – I’d be researching going after the developer for fraud in the inducement, or malpractice in whoever verified the chain of title. The idea of tricking people into “buying” a house that reverts back to the freeholder after the long-lease expires is thoroughly vile.
Presumably this was all iterated in the sales contract including a small amount of ground rent. As i understand it, the surprise part is that the land was sold to investors to who are jacking up the ground rents with impunity.
In the Palm Springs area, there are homes on leaseholds. Injun land.
– I am (pleasantly) surprised to see this kind of action by the UK government. I fear that if this was happening here in the US the government would lift a finger to help the people who have suffered from this scheme/scam.
Countries like the UK and USA that have de-industrialised and are well into their decadence phases are also now well and truly in the grip of the rentier and usurer. These leasehold ripoffs are just one of many signs.
Adverts on TV offering money at 1300% APR to the struggling (demonized as ‘feckless’ but mostly trying to keep a roof over their heads)- there was a time when this would have been widely regarded as repugnant – rightly so – but one company in the UK (wonga.com) was actually given a business award by The Daily Telegraph newspaper (whose proprietors are ultra-rich tax avoiders).
A country wherein loan sharks are given business awards is one whose moral compass is seriously askew.
A glance at history doesn’t provide comfortable viewing as to what comes next for societies that are saturated with debt, and wherein the spiv and chancer has come to the fore.
And the Chinese are loving it [as long as they don’t implode under the weight of their staggering amounts of consumer debt first of course].
You are not only writing solid reports on Italy and Spain Mr. Quijones, but this one on the U.K. is first class: congratulations.
Yes, ground rents go back into the mists of British history. However they were historically so small in the overall transaction that most people never really bothered too much.
Then came deregulation, the rise of the, stop at nothing, predator class and here we are today.
This once Green and Pleasant land is now in a total mess. It would not surprise me if it became the long sought after Black Swan unless someone, somewhere gets a grip.
I’m at the end of my tether with UK gov bailing out idiots who could and should know better.
The net result is the people ‘doing the right thing’ as David Cameron said, aren’t rewarded, they’re actually punished by paying for the bailouts.
Lets be honest here. Taylor Wimpey will be ‘too big to fail’, and the creditors won’t be told to go walk, so out comes the public purse to settle up the money.
Privatised profit, socialised debt.
Consequences and accountability are so last century.
The sheeple have sanctioned crony capitalism with their votes for the oligarch-captured Establishment status quo. Their kleptocrat overlords have to give them the reaming they voted for.
– The dutch city of Amsterdam also has this kind of leasehold/rent. And in the last say 4 years those leases also has have risen significantly. It means more (tax-)income for the city, not for speculators because the city benefits.
– My personal opinion is that this system should be abolished completely. The city is already “hitting” the real estate owners with property taxes.
“Why did no executive at the company say, ‘This will come back to haunt us’?”
It’s been shown that excess profits stimulates the Greed center of the brain and shuts off the Judgement and Ethics centers. Severe cases are often terminal for everybody except the actual patient.
Nothing can turn a human into a lemming faster than a stack of cash.
Any executive who talked like that would be quickly booted out the door. It’s about short-term profits uber alles, and anyone who dares get in the way or urges caution gets crushed.
This story would be more interesting if we got actual data on the magnitudes, i.e. say someone bought a house for 600K pounds, how much did the developer typically get from selling the land separately?
Did any informed buyer negotiate that they be the land buyer for an extra price?