What is a human? And what rights do they have? I am not talking about artificial intelligence or robots. I am talking about hedge funds. Are they human and do they have human rights?
Leaseholders may by now have guessed that I am discussing the value of a lease when the freeholder extends or sells it.
After the Norman Conquest and Domesday Book, all land in England belonged to the king. Barons might be allowed to build a house on a portion of it, occupy it for life and rent it out to serfs. But ultimately the King owned it. They were there at his pleasure and evicted on his whim. Vast swathes of London are still mainly owned this way — think Westminster (Grosvenor), Marylebone (Portman, de Walden), Kensington (Cadogan), and of course still The Crown Estate. But leasehold is not just for wealthy aristocrats. It is how flats across England and Wales are still held.
Once a leaseholder has paid for the right to live for 99 years in 100 cubic metres of air encased in concrete they soon realise it is a milking parlour. They have to rent their share of the earth on which the block of flats stands. No longer the price of a peppercorn, ground rents and the right to raise them regularly are sold on to hedge funds. Leaseholders who want to avoid this and buy out the freeholder have that right. But wealthy landlords and their £1,000 an hour lawyers have found ways to make that costly and difficult.
The Law Commission in England and Wales has stepped in to sort out the mess. The first of four major reports into leasehold was published last month — a 322-page tome examining the real value of buying the freehold of a property that was leased out.
Ground rents are the simple bit. The freeholder gives up their right to a certain income over the remainder of the term of the lease. There are well-established formulae to work out the value of a promise of regular payments into the future.
Then the freeholder also gives up the value of actually owning the property when the lease ends — the reversion. In most cases that will be after the freeholder is dead, so you may think it had zero value. But no. The European Convention on Human Rights has a rule on that.
Article 1 of the Protocol to the Convention says every “person is entitled to the peaceful enjoyment of his possessions”. And taking the freehold without compensation would deprive the freeholder of that right. However, the full sentence reads: “Every natural or legal person is entitled to the peaceful enjoyment of his possessions.”
You and I, reader, are natural persons. Legal persons are those recognised by the law and include a company or other entity that can enter into contracts and sue or be sued. Including hedge funds. These legal persons are not mortal, so the value 99 years hence is worth more to them than to us.
If you want to deprive a hedge fund or a trust of the right peacefully to enjoy its property, you must pay. Again, there is a formula and in the Law Commission example it is four times the value of the ground rents.
That is still not enough for the rapacious landlords. Their cunning lawyers have invented yet a third sum which uppity leaseholders should pay if they have the arrogance to want to become a freeholder themselves.
In a model of legal obfuscation it is called “marriage value”. That is no more than the legal embodiment of the saying “the whole is worth more than the sum of its parts”. If there are 20 flats in my freehold building and 20 leaseholders club together in some sort of union to deprive me of my rents and the value of their own little flats, my loss also includes the value of owning a whole block on a significant piece of land. Those pesky levellers get their bit of that advantage, and I want my share of it!
Marriage value applies if the lease has less than 80 years left to run. It is shared equally between the freeholder and the leaseholders and can also be four times the ground rent value.
The Law Commission wrote 137,703 words to come up with no clear recommendation on marriage value. It was clear that leaseholders must pay compensation for lost ground rents. It also said leaseholders must pay for the lost value of the flat because hedge funds have human rights. On marriage value it said — erm, well it could be scrapped. Or kept as it is. Or renamed “hope value” which no one will understand either, but would be only about half the marriage value.
One of the other three Law Commission reports on leasehold due out this year will look at alternatives to this Domesday system. That won’t help the feudal vassals already trapped at their landlord’s pleasure in a property which falls in value every year. Only scrapping it, as they did in Scotland in 2015, will restore human rights to humans. After 1,000 years that would be real help for millennials.
Paul Lewis presents ‘Money Box’ on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney