PPI-style compensation scheme for leasehold home owners could pay out billions

Labour MP and leading leasehold reform activist Justin Madders has secured a second reading of a Bill that aims to introduce a compensation scheme for existing home owners suffering from unfair leaseholds.

He described leaseholds as a “scam”, with possible compensation being the “PPI of the house-building industry”.

He said the recent Government consultation – which suggests limiting ground rent charges and stopping sales of new-builds as leaseholds – would help new buyers, but said more needed to be done for existing home owners stuck with unfair leaseholds.

Madders, deputy chair of the All Party Parliamentary Group on Leasehold Reform, said developers and freeholders made it too difficult and expensive for home owners to buy a lease, particularly where it is sold to offshore companies. He also pointed out that this also made it more difficult for a home owner to sell their property if their lease was unfair.

Madders said his Leasehold Reform Bill would introduce a statutory pricing model for purchasing a leasehold at no more than ten times the ground rent.

Such a system would involve a simple formula based on ground rent and number of years left on the lease along with a cap, he said.

He said a compensation scheme should also be set up to cover where misleading particulars have led to an unfair leasehold.

He said developers, freeholders, finance companies and conveyancers should be held responsible.

Madders said: “We need similar process to PPI for those who have fallen victim to this scam. We need to give people the chance to fairly escape that trap.

“This Bill may help in that process.”

MPs in the debate were asked to vote on the issue and all gave it their backing. A second reading is scheduled for February 2.

Banks have paid out £28.2bn in compensation for the PPI scandal since January 2011, with the deadline for claims now August 29, 2019.

It is not known what the bill for mis-sold leaseholds could be.

A feature of the PPI scandal was the number of ambulance chasing claims companies that emerged.

Sebastian O’Kelly, of campaigners the Leasehold Knowledge Partnership, backed the Bill, and said previous redress schemes announced by individual house builders were either “incoherent or inadequate”.

O’Kelly told EYE yesterday evening: “Madders is absolutely right that this needs statutory intervention. I don’t think the Bill will be as high as PPI but it has caused at least 100,000 properties to be blighted, according to Nationwide figures.

“The aggravation and grief would however exceed the PPI scandal.

“Most people who unwittingly purchased PPI insurance on their credit card will have been inconvenienced but the leasehold issue is a different scale of grief.”


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  1. Anonymous Coward

    That would be a HUGE change.

    I wonder if it will get past all the vested interests in the two Houses.

    As a further thought, anyone with investments in property companies (think your pension fund) will have issues with this.

    The value of publicly listed companies that hold the freeholds for thousands of older leasehold units (not the new leasehold houses that have caused this issue to come to a head) are going to be wiped out.

    An example:

    A flat built (let’s say) 45 years ago with an original lease of 99 years lease, now has 54 years remaining.   If the flat is currently worth £227,549 (average UK flat sale price June 2017) and it had an initial ground rent of £50 a year rising by £50 per year every 33 years, the current owner pays £100 per year ground rent alongside their service charge.

    A lease extension (as calculated by the Leasehold Reform and Urban Development Act 1993) would cost very roughly £28,000.

    “That’s a lot of money!” I hear you say…

    But, if you put just £1,200 into a boring, ordinary high street savings account back in 1972 that would have paid for the lease extension now.

    “Ahh!” but I hear you say, “£1,200 was a lot of money in 1972.” And you would be right, but the average house price in the UK went up by 39.8% in 1972 – a smidge under £2,400 – IN ONE YEAR…   One of the main reasons that lease extensions are expensive is because house prices have gone up SOOO much.

    But if you were financially astute, you could have put £500 into an ISA in 1987 to pay off that lease extension, or invested £275 in the FTSE.

    The whole deal with leasehold is that you (are supposed to) get a discount from the price because you are not getting a freehold.   Because most members of the general public do not understand this (because no-one ever tells them) and the nature of the property market in the UK tends to be up, up, UP – then buyers have to pay what they have to pay.   The fact that this is “over the odds” is not actually the fault of the freeholder.

    So, let’s assume for a moment that the flat was sold for “the correct price” suitably discounted the first time and that the freeholder is a nice, decent, honest person who has NEVER done anything wrong (YES, I know that doesn’t apply to some freeholders but I promise you that I’ve met at least one in 25 years).

    What this legislation potential does is legally rob the freeholder of the money that they are fairly due.

    His income for the lease extension (or sale of the freehold) goes down from (roughly) £28,000 to £10,000 – that’s 66% off. 

    That’s just the nice guy, who’ll probably shrug and say “Oh well!”.

    So let’s think for a moment about all of those pension funds with your money (approximately) one third invested in UK property.   The freehold investment companies are going to be put under huge pressure to DO SOMETHING.

    That something will involve some of the very best barristers in the country.

    Whilst I agree that something needs to be done about the recent excesses (jail terms seem appropriate to me) and a PPI style compensation scheme might be good (except where’s the money going to come from – oh, that’s right the taxpayer – me again, yay!), I worry about the Law of Unintended Consequences.   We have seen successive UK Governments meddle with the housing market for years and it never ends well!

    1. Rain-man35

      If the discounted value of the ground rent using a prescribed discount rate set by the government was shown as part of the consideration payable then many of the problems would never have arisen

      Ground rent is deferred consideration and its imposition lowers the premium paid for the property and therefore is a sort of loan. The Consumer Credit Act provides for various disclosures and if the rent is correctly valued and shown next to the premium the buyer can make an informed decision




  2. dave_d

    I’d be interested to know how you calculate the compensation

  3. Cicero

    Compensation from whom, exactly?

    Having spoken to lots of people who have bought leasehold flats, those who seem to be in the most trouble are those who did less due diligence on buying a flat when compared to buying a telly.

  4. jamess48

    Abolishing the concept of leasehold tenure is a completely ridiculous idea. Leases provide a contractual framework to enable a block to be effectively maintained and managed by the freeholder. However, all new leases should be 999 years with zero ground rent.


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