Leaseholders hit again by cost increases

Going up… the increase in the National Living Wage will hit leaseholders in 2020

Many services such as cleaning and gardening contracts provided to blocks of flats rely on minimum wage labour.  With the National Living Wage rising in April this year from £8.21 to £8.72 for workers over the age of 25 –  an increase of some 6.2% – once again leaseholders are going to feel the pain.

Leaseholders who are unable to recover VAT on the service charges they pay, continue to suffer from VAT increasing from the previous long term norm of 17.5% to 20% in 2011.  Flat owners, via their service charge, have also suffered continual rises in insurance premiums due to both five years of IPT (insurance premium tax) increases from 6% to 12% since 2015; the abolition of the 3.4% national insurance rebate on porters wages; and a rise from 2% – 3% in employers auto-enrolment pension contributions.

Added to this, the rise in the minimum wage may be small but it is yet another expense to hit leaseholders, already living with the spectre of big bills for safety improvements on their blocks (see our 9 January blog for more on this).

At Ringley all our Relationship Managers are now letting clients know in advance of their March/April budgets that, to be prudent, provisions must be made for these cost increases.

How leasehold reforms will benefit flat owners

The Law Commission’s proposed reforms could save leaseholders money and help keep them out of the FTT

Last Thursday the Law Commission published its report into leasehold reforms. The Commission puts forward three schemes for determining the premium to be paid by flat owners wanting to extend their lease.  Each of them will make enfranchisement cheaper, saving leaseholders money. Each scheme uses a different method to determine the price of enfranchisement and allow further reforms to make the process simpler and to reduce uncertainty.
 
The report also examines the way in which the value of the landlord’s interest is calculated, to identify reforms that could lower premiums without breaching the UK’s human rights legislation that protects landlords’ property interests.

Alongside the three schemes, the Law Commission has put forward a range of other options for reform. These include:

  • Prescribing the rates used in calculating the price, to remove a key source of disputes, and make the process simpler, more certain and predictable.
  • Helping leaseholders with onerous ground rents, by capping the level of ground rent used to calculate the premium.
  • Developing an online calculator for determining the premium, making it easier to find out the cost of enfranchisement, and make the process more transparent.
  • Enabling leaseholders who are collectively enfranchising a block of flats to avoid paying “development value” to the landlord unless and until they actually undertake further development.

What is being proposed are ‘cash and carry’ lease extensions, which would lead to fewer referrals to the over-worked first-tier tribunal. While the legislative change is not retrospective, it would have the retroactive effect of devaluing existing landlords’ interests that arise from the lease.  All freehold reversionary properties are valued by chartered surveyors on the basis of the lease length and terms and, as the RICS definition of ‘market value’ includes hope value, in effect the valuation today includes the probability of some lease extension income. If this is to be curtailed in law, then the effect is a reduction in the value of the landlord’s asset.

So while this proposed change does not alter the lease contract itself, it has two impacts: devaluation of the reversionary freehold interest and reduction in the premium payable to the landlord for each specific lease extension. 

Ultimately, any proposals that make leasehold extensions cheaper can devalue the asset. This will be very unpopular with landlords  And while these reforms would save leaseholders money, the erosion of the benefits of being a freeholder would likely see an increase in non-professionally managed blocks, absentee freeholders and other court processes. 

However, there may be additional upsides for leaseholders by removing the ability of unscrupulous freeholders or their agents to put pressure on leaseholders by refusing to negotiate until the 11th hour in order to extract more money than would be reasonably expected.

To read the full Law Commission report go to: https://www.lawcom.gov.uk/project/leasehold-enfranchisement/


More red tape for besieged agents

New money laundering legislation comes into force today. Regardless of Brexit, property agents must abide by the Fifth EU Money Laundering Directive, ensuring they risk-assess their business processes and carry out thorough ID checks on customers.

Agents will need to carefully consider how they might find themselves exposed to money laundering and to the risk of financing terrorism and ensure they have measures in place to manage and eliminate any risks.

Letting Agent Today explains that agents must carry out customer due diligence on landlords and tenants where renting is “for a period of a month or more, and at a rent which during at least part of that period is, or is equivalent to, a monthly rent of 10,000 euros or more”.

 If a third party is acting on behalf of another person in a particular transaction, that person is described in the legislation as the ‘beneficial owner’, ie the person on whose behalf a transaction is carried out. Beneficial owners must in future be identified and any potential risks they pose be assessed. It will also be important to assess the risk of money laundering that could result from:

  • Sending money to customers to or through high-risk third countries which don’t have effective systems in place to prevent money laundering or terrorist financing;
  • Company services or transactions;
  • The financing methods used to support the business; and
  • Other transaction-based activities such as non-face-to-face services.

All customers and beneficial owners are now subject to identity checks via an official identification document such as a passport or driving licence. Photo ID, as well as verification of the current address, will be needed for both new customers and existing clients if their circumstances change.  Due diligence also applies should agents have any doubts about the authenticity of an existing customer’s ID information or suspect that money laundering or financing terrorism may be taking place.

Under the new rules, risk assessments must be recorded, kept on file and regularly reviewed. Any changes to a business, it’s financing or the environment in which it operates will trigger an updated assessment, which must be made available to HMRC on request.

Of course the property sector should not provide an easy route for money laundering. But at a time when the industry is steeling itself for yet more reforms, this new legislation is yet another hoop for agents to jump through. And this is being piled on top of the 125-plus other rules and regulations that agents are faced with on a daily basis. That said, it is hard to argue against legislation that should go some way at least to safeguarding the sector from criminal activity.

How the new cladding form could get the flat sales market moving again

Grenfell ‘Tower continues to cast its long shadow over the flat sales market – but a new form may help

Yesterday, a new form (EWS 1) was launched, designed to record what testing has been carried out on the external wall construction of HRRBs – buildings more than 18m high. This is good news for leaseholders – and building owners and managers.

Since the Ministry of Housing, Communities and Local Government (MHCLG) Advice Note 14 was adopted by lenders, many flat owners have had problems getting mortgages, or even remortgages, on HRRBs (high risk residential buildings). 

Developers are often willing to provide a statement of what was specified (but as we know – that might not be what was installed) but lenders won’t necessarily accept them for lending purposes.  Flat owners who bought their homes before the Advice Note came into force, are left unable to remortgage – and may even be facing higher interest rates on their mortgage as a penalty for something that is entirely beyond their control. 

AN14 called for surveyors to provide proof that buildings don’t have dangerous cladding and has stalled mortgage offers while assessments are done, trapping leaseholders in flats that have become unsellable. In many cases, valuers have erred on the side of caution and set the value of some properties at zero. ARMA CEO Nigel Glen reports that one of his members has at least 500 stalled sales as a result. That firm is not alone.

So what’s the difference between AN14 and the new EWS 1? One big change is that there is now a line telling lenders and buyers that they cannot rely on the form – only the building owner/manager can. At first glance this doesn’t sound helpful but the authors have worked hard to ensure it will unlock the current snarl-up in the flat sales market.

This is how it is hoped it will work:

To-date, fire risk assessors have provided their opinion on the safety or otherwise of blocks to the building owner and so could end up answerable to any third party who relies on the report. That assessor is potentially liable to multiple lenders and buyers. Assessors’ indemnity insurance premiums have gone through the roof – and some can’t get insurance at all. This means buildings can’t be assessed and the whole process grinds to a halt.

The new form allows assessors to disclaim liability to everyone but the person who commissioned the report. Mortgage lenders can decide for themselves whether or the information can be relied on. The general feeling is that at least some will.

There are also two distinct alternatives listed in EWS 1 for assessors to choose:

Option A – external wall materials are unlikely to support combustion; or

Option B – combustible materials are present in the external wall.

It is likely that an invasive inspection will be almost always be required – desktop exercises are out. Good.  And any investigation must include evidence of the fire performance of the actual materials installed. This means safe buildings can be recorded in a way that will – hopefully – get the market moving.

We are pleased that there is now an approved form and ‘declaration’ to give much-needed help to leaseholders. However, the challenge is that ultimately this cladding problem is still costing the homeowner. Invasive testing is now pretty much a requirement on HRRBs, often at more than £5,000 a time.

Remediating the many buildings that are failing inspections has to be a priority for 2020. And it’s one the government should not leave to chance.

Property managers take centre stage on safety

Dame Judith Hackitt’s recommendations are now being firmed up, so watch this space.

Ringley CEO Mary-Anne Bowring was joined by Life by Ringley MD Sam Hay at an RICS event in Manchester in November to talk about the future of building safety.

Last month, we blogged about the ‘golden thread’ of data that Dame Judith Hackitt’s building safety review is recommending should be established for every high-risk residential building (ie, one that is 10 storeys or higher) in the country. The review also sets out the framework for a new ‘Joint Competent Authority’ to ensure that safety is placed firmly at the heart of the property industry.

The Hackitt review proposes the new JCA should have an overarching role, bringing together local authority building standards, fire and rescue authorities and the HSE. The report recognises the role that the CDM regulations have had in improving accountability and responsibility for safety and sees a future where these bodies all work together to maximize the focus on building safety within HRRBs across the entire building lifecycle. The recommendation is this: the best way to get genuinely effective safety management is to establish a new body that ensures feed in from other bodies is made an absolute requirement.

As we explained in our previous blog, one of the key responsibilities of the proposed JCA will be to create and maintain a database of all HRRBs and key duty holders for those buildings – whether under construction or already occupied. It will also ensure duty holders focus on mitigating building safety risks during the design and construction phase.

A new role of building safety manager will also be created – above and beyond the role of the property manager. The increased focus on reducing ongoing safety risks in HRRBs is not the property manager’s job – and is certainly not achievable within the same base management fee per unit.

The responsibilities that will fall to the building safety manager are likely to include:

  • periodic safety case reviews to demonstrate that building safety is being maintained and that residents are properly engaged (this may also be triggered if a significant refurbishment is planned); and
  • dutyholders required to make building improvements where necessary, to reduce building risks so far as is reasonably practicable.


The JCA is a new independent body and will be expected to assess and deal with immediate ad-hoc building safety concerns on HRRBs including:

  • the mandatory reporting of safety concerns by dutyholders;
  • referrals made by Environmental Health Officers (EHOs);
  • escalated referrals made by residents of HRRBs.

The JCA can also expect to:

  • request testing of construction products that are critical to HRRB building safety on a reactive basis when concerns arise, including information exchanges with all HRRB dutyholders in exceptional circumstances.
  • request annual reports from product testing houses providing summary details of the types of tests carried out and the numbers of passes and fails reported; and
  • help the proposed new government body to validate and assure the guidance produced by industry to meet the outcomes-based goals of the Building Regulations.

So a whole new raft of responsibilities then. Enhanced levels of training will be required as the industry gets to grip with the new regime – and there may be a need for higher levels of PI insurance for block managers as they take on these obligations. At present these are only recommendations but watch this space – our industry is changing and there will be more to come.

Terrorism: is your block policy right for you?

Don’t get caught out without the right insurance

With vigils held earlier today for the people killed and injured in Friday’s horrific terror attack at London Bridge, our thoughts are with the friends and families of the victims. And as leasehold specialists, the team here at Ringley is also well aware of the implications of the threat of terrorism for property managers, their clients, and residents.

Terrorism cover used to be included in block buildings insurance policies up to a certain limit. In 2003, this was replaced by full all-risks terrorism insurance from the government-backed Pool Re scheme. Other less comprehensive (and cheaper) policies are also available in the London Lloyd’s market.

It is likely to be a condition of the lease that blocks are covered and the RICS Service Charge Residential Code recommends giving terrorism insurance “serious consideration”. Anyone who arranges buildings insurance must ensure they comply with the terms of the lease and the Mortgage Lenders Handbook. If either of these states that “all risks” or “explosion” need to be covered, your block must have terrorism insurance. If the worst were to happen, non-compliance would mean the building owner or, in self-managing blocks the RMC directors, being held responsible. This could put personal assets at risk. For leaseholders, if an act of terrorism damages your block, you will still have to pay your mortgage and find the money for alternative accommodation while repairs or rebuilding takes place.   So the right cover is vital.

The other aspect to take into account is the impact on residents, not necessarily of a direct attack on their home but of any incident close by. On Friday, immediately following the events at London Bridge, the police put the whole area into lockdown. As with the 2017 attacks at nearby Borough Market, local residents were told they couldn’t go home and must find somewhere else to stay.

As soon as any claim is made, blocks covered by the Pool Re policy will be paid out by their insurer who will then recover the costs. This means, if needed, temporary accommodation will be paid for. Other schemes may not pay out until the incident has been certified by the government as terrorism – which may take a day or two – and residents may be left out of pocket.  So before taking out a policy that looks like good value, read the small print carefully.

Statistically, the chances of a residential block being targeted by terrorists are low – in fact, they are literally one in a million according to disaster experts. But with apartment blocks springing up all over our towns and cities, it is still possible that your building may be affected. So check your lease – and your insurance policy – to make sure you don’t fall foul of the law or leave residents unprotected.

Stamp duty: yes, overseas investors should pay more

Buying UK property is a privilege that should be paid for

Yesterday, the Conservative Party launched its 2019 General election manifesto, setting out the policies it will pursue if it is re-elected next month. Tucked away in the section on housing delivery is the promise, announced last week, to introduce “a stamp duty surcharge on non-UK resident buyers”.

The plan is to levy an additional 3% stamp duty on non-UK property buyers, including companies as well as individuals – and also expats wanting to come back to the UK.

The Conservatives, using figures from a 2017 University of York research report, say one in eight new London homes were bought by non-residents between 2014-16. A Kings College London study is also quoted, which alleges that a 1% increase in homes bought by overseas investors has reduced housing supply, leading to a 2.1% increase in prices.

The Tories’ argument is that this level of overseas investment “adds significant amounts of demand to limited supply, inflating house prices and making it harder for people in Britain looking to get a foot on the property ladder”.

According to Property Investor Today, if the higher tax was implemented, a wealthy overseas buyer of a London home worth 1.5 million would pay 183,750 in stamp duty compared with 93,750 for a Londoner buying the same property. The measure could raise up to 120 million a year and the money would be used to tackle rough sleeping.

Other cities around the world, including Hong Kong, Singapore and Vancouver successfully levy similar surcharges and we are wholeheartedly in favour of bringing in this measure here too.

Ringley CEO Mary-Anne Bowring believes stamp duty is a way to either curb foreign demand for UK property (if that is indeed possible) or at least to earn more tax from it.  Any tax is a barrier to a free market but it is important that a free market is not at the expense of hard-working UK residents.  The fact is, she says, is that it has been far too easy for foreign investors to take advantage of our Brexit woes and the recent fall in the value of sterling.

The UK is still regarded as a safe haven for investors and we have become a cheap place to buy due to exchange rates (proven in the Kings College statistics quoted).  So it is unfair that the UK should become increasingly more expensive for our own residents to buy, eat and live! 
 

“In fact, there are other countries that treat it as a privilege for foreigners to be able to invest in their domestic markets and I believe that the UK should charge a premium for the privilege,” says Mary-Anne.

We welcome this proposal. What do you think? Let us know in the comments section below.

How a ‘golden thread’ of data will help keep residents safe

Sam Hay (left) and Mary-Anne Bowring (right) spoke to RICS members about the future of building safety in Manchester on Wednesday

At an RICS event in Manchester yesterday Ringley CEO Mary-Anne Bowring and LifebyRingley MD Sam Hay spoke about the impact on block management of Dame Judith Hackitt’s building safety review. For now, this only applies to high-risk residential buildings (HRRBs) – which are defined as those with 10 or more storeys.

One big idea is the proposal to create a ‘golden thread’ of key information about every new HRRB in the country. This data is to be digitally recorded, maintained and made readily available to all stakeholders, including residents.

The kind of information that will be recorded is

  • Size and height of the building
  • Structure
  • Building fabric
  • Escape and fire compartmentation information
  • Systems in operation
  • Permanent fixtures and fittings

This will not only apply to new buildings, so you can imagine the difficulty in retrospectively piecing this together for existing stock. There are estimated to be between 2,000 and 3,000 such buildings in the UK.

Block managers are only too well aware that a lack of complete, accurate and properly maintained building information is common and throws up a number of challenges. The building owner doesn’t have to keep the information that is required to be able to easily and effectively manage building safety throughout the building life cycle so it is often virtually impossible to work out whether any changes have been made between the original design and completion. This may have an impact on the building safety strategy as modifications and refurbishments are made over the years.

The worry here is that what gets lost is the fire scheme, as originally conceived. Also when carrying out a major works project or fully refurbishing a building, it is difficult for both block managers and their contractors to work out what impact any changes might have on safety in that building.

This information gap has become all too clear during the inquiry into the Grenfell fire, where a recent refurbishment contributed to the tragic loss of life. In future, with everyone involved in the operation and maintenance of the building as well as the fire service having access to this ‘golden thread’, building design will be made completely transparent. Any changes that could impact safety can then be managed through a formal review process – another of Dame Judith’s recommendations which Mary-Anne and Sam also discussed with their audience.

 Of course, as we point out above, these proposed changes only apply to HRRBs, ie those blocks that are above 18m high. But anything designed to keep flat owners and renters safer in their beds is to be applauded. At least it’s a start.

Parties promise big on housing – but can they deliver?

Training will be vital to tackle skills shortages but more is needed if we are to solve the housing crisis

This morning the two main political parties both made election commitments to deliver much-needed housing.  Labour’s manifesto promises £75bn to deliver the biggest social housebuilding programme since the 1960s. The party has set itself the task of providing 100,000 council houses a year by 2024  – a tall order in anybody’s book.

The Conservatives are also promising major change –   announcing a number of policies alongside their million homes pledge, which includes an overhaul of the planning system.

In contrast to Labour, the Tories would not use public money to build more homes, but instead, plan to promote policies encouraging the private sector to deliver the housing stock we need. Today’s announcements included the promise of a new mortgage with long-term fixed rates and a 5% deposit to help renters get on the property ladder. They also pledged to start a new scheme giving first-time buyers a 30% discount on new homes in their area.

Yesterday, the Liberal Democrats promised to build 300,000 homes a year by 2024, including 100,000 social homes. And the Green Party manifesto also promises an extra 100,000 council houses a year.

These pledges are welcome. We are well-aware that the country faces an ongoing housing crisis with too few affordable houses and property prices putting a first home out of reach for many young people. However, the question has to be asked, how is all this to be achieved?

Labour’s Angela Rayner may have got hackles rising in the building trades this morning as she asserted that it doesn’t take long to train to be a plasterer. A six -month training course is all that’s needed, she said. This is debatable but what is certain is that the construction industry is facing serious skills shortages that are likely to get worse post-Brexit. Labour’s pledge to train more workers is one solution but it is likely to take a lot longer than six months to get boots on the ground.

Whichever party ends up forming the next government, if serious numbers of homes are to be built they will need to get to grips with not only skills shortages but with a range of other long-neglected issues. Re-skilling and streamlining planning and building control will be vital, as is a shift towards modular construction to take the heat out of those shortages and ensure quality and compliance. And new financial models and incentives are desperately needed to get developers building affordable homes.

Without attention to detail, nothing will change.

Heat networks: have your say

Do you manage a building with a communal heat network, or own a flat or a building that uses one? If so, you’re certainly not alone. Did you know there are at least 14,000 heat networks in the UK – we didn’t! These include both district heat networks which supply multiple sites and the communal heating systems that supply a number of units within a single building, with which many property managers will be familiar.

The UK is committed to achieving net-zero emissions by 2050 and heat decarbonisation is one of the biggest challenges.  The Government thinks heat networks are crucial to meeting this target because they are uniquely placed to unlock otherwise inaccessible sources of larger-scale renewable and recovered heat sources such as waste and heat from rivers and mines. In the right circumstances, heat networks can reduce bills, support local regeneration and are a cost-effective way of reducing carbon emissions from heating. 

The Government is now consulting on proposed amendments to the Heat Network (Metering and Billing) Regulations 2014 to make them more effective for suppliers and users. The current regulations set out rules around installation of heat meters and billing for customers. The meters enable suppliers to produce fair and transparent bills based on actual consumption  – and like domestic Smart Meters, they can drive energy efficiency savings and cost reductions.

In some cases, the requirement to install heat meters and heat cost allocators is subject to a ‘cost-effectiveness’ test set out in the regulations.  The consultation explains how cost-effectiveness is measured. It includes proposals to update the way it is assessed and describes how the cost-effectiveness tool for heat suppliers will be amended. The changes will affect those suppliers with buildings where a cost-effectiveness assessment is required but where, to-date, the tool has not been available.

The government also proposes to extend the provisions set out in the regulations covering meter accuracy, maintenance, and billing based on consumption to all existing metering devices. These requirements would extend the regulations to some heat suppliers who, at present, don’t have to comply.

The thinking here is that metering accuracy and maintenance, as well as billing based on consumption where cost-effective, are vital to delivery and help maximise the benefits of metering. They should therefore apply to all installed metering devices. 

Finally, the consultation contains several proposals clarifying areas where the current regulations are unclear and it includes a provision to support the enforcement of meter accuracy and maintenance.

The changes are expected to increase the number of customers with heat meters installed and the government is keen to hear from industry and from customer representatives.  If you have a view on heat networks and/or metering, you still have time to respond. The closing date has been extended from 12 December to 9 January 2020 because of the general election, so if you haven’t had the chance, take a closer look at the changes here.