Insider Secrets: Auctioneers’ Knowledge Tips & Hints From The Pro’s

Those of you who have been reading my articles will, I hope, remember how I have touched on the subject of rentcharges before. I have commented about my chartered surveyor golfing friend, who was astute enough in his earlier years to buy portfolios at figures as low as three times the annual rent - 3 years’ purchase, or 3YP - and who, having sold some of them off to the payers, covered his original costs and now has a very comfortable pension in his mid-40s from the receipt of the rents he didn’t sell, and which are now in his accounts at virtually no cost. In that article, if I remember correctly, I then moved into some of the ramifications and differences between annual rentcharges (chief rents or feu duties) and ground rents. Nevertheless, many PAN readers are still asking for some explanation of the logic of the prices paid. It is perhaps “the blind leading the blind” if I admit that at times I am not sure I follow the logic either, and I am particularly still searching for the solution as to why some individuals and funds are willing to buy rents with a very low income at present and which only revert to a large sum quite a long time into the future.

I am still trying to reconcile in my own mind three recent experiences. Firstly, in my last auction I sold an income of £226 per annum due individually from a row of houses in Rossendale, mid- Lancashire, at £2,300. Secondly, I met an owner-occupier only yesterday who pays a rent of £4 per half-year and who was seriously considering purchasing at £200 plus solicitors’ fees to remove the responsibility for paying that £8 pa. Thirdly, I had one of the many firms who advertise their desire to purchase rentcharges in the Estates Gazette ring me to say that they were willing to pay up to 1 OYP for portfolios of small rents, collectable at £4-£5 a time. That offer was made despite the fact that small rents of that kind are difficult, expensive and, quite frequently, impossible to collect. And all these experiences are in the light of the fact that in my auctions, normal prices for rentcharges in the north-west are between 4.5 and 7.5YP.

You have to remember first, and I emphasise, that these sales are in the north-west, where virtually all ground rents are for the balance of 999 years, or are for chief rents which were originally defined as payable for ever. I think the market has not yet come to terms with the fact that following the Rentcharges Act 1977, the life of chief rents is restricted, if I remember rightly, to 2025, when they will be terminated without compensation. The fact that at this stage in my article I have to emphasise that there are different kinds of rentcharges, is some clue to the variation in figures we see realised and published. Remember first of all that there is always some effect on value by the quality of the security underlying the covenant to pay, and the situation of that security. Then we can look at some of the variety.

Your investment may be the aggregation of a selection of rents collected house by house. The amounts collectable may be small or large; there may or may not be difficulties collecting the rents; the covenants may be pretty strong or very weak; and the securities may be old or new property; in good, moderate or bad situations.

Probably easier to collect are charges on blocks of flats, where a single rent is due from the freeholder or the service company managing the block, but for some reason or other if the rents are due from individual flats they generally seem to be more difficult (and hence more expensive) to collect. As the individual collectable amounts become bigger, so the securities can be for block after block of buildings, or acre on acre. The larger the amounts and the greater the securities, the easier the rents are to collect, and therefore the YP a purchaser is willing to pay is greater. I remember how, several years ago, I had to auction a largish rent of £800 per annum, secured upon a very wide strip of land where the money due was payable by a statutory undertaker and where the strip ran right across the main west coast railway line.

It was only whimsy in my office that had me dwelling on the prospect of the rent becoming unpaid, and the bailiffs instructed to collect, distraining on a single railway sleeper under each line and disrupting all the west coast train timetables! The buyer had the security of a strong covenant, reliable security, ease of collection, and before buying ground rents, and this really is the million dollar question, is “what are the covenants linked to the responsibility to pay?” I think that the answer tothis question is the real nub of how much a purchaser should or would pay. I am aware of at least two practical examples of the benefits covenants can give to the owner of rentcharges. One large estate company in a north-western coastal resort is renowned for the pecuniary advantage to which they put their right to certain covenants in the rentcharge deeds. With rentcharges secured upon individual houses - built both pre-World War II and after - they reserve the right to approve any alterations to the external appearance of the houses. Their rights even extend as far as the appearance of garden sheds.

The last I heard - and it may have been slightly apocryphal - was that consents for sheds were £250 each and that variations of elevations or extensions could cost up to £1,250 a time. A similar example became a feature in mid-Lancashire and national newspapers a few years ago, where a solicitor from the Americas reaped serious trouble after buying a portfolio of rents covering much of a northern town, by enforcing his covenants in a very greedy way. Not only did he look for very large sums if anybody wanted to buy out their rents, and big sums for consents for sheds and alterations, he was also seeking to extort fees for arrears letters, for bailiffs’ costs and for his own administrative costs in pursuing arrears. Perhaps he was a banker in a previous existence! Nevertheless, his approach and high costs did not find approval in the courts when some of his tenants “revolted”. Incidentally, in my view, unless it is specifically reserved in the original rentcharge deed or unless sanctioned by a court, such costs other than bailiffs and court charges cannot be legally demanded from a rentcharge payer. My chartered surveyor colleague, to whom I referred in my opening paragraph, takes the rather extreme view that such behaviour is “extortion of money by false pretences”.

I have not yet touched on a slightly different type of ground rent - often known as a freehold reversion - which gives the freeholder the right not only to collect a ground rent but also the benefit or responsibility - depending upon how you view it - of running the maintenance and management of a block, coupled with the right to collect service charges. Many individuals have purchased this type of freehold and used it to give themselves a profit on the service charges. Frequently deeds give them carte blanche to do so. Certain of my readers may well still live in blocks where their service charge cannot be questioned, and where freeholders determined to make a profit out of their position have done so by charging excessive management fees; running their own insurance cover where the premium is high with the risk then reinsured at a much lesser cost with an established insurance company; and where they have taken large commissions from builders and other service providers. Where investors of this ilk have sensed such opportunities, they have obviously been very willing to pay what would otherwise seem to be highly excessive YP figures for the sake of the extra profits they can reap in addition to the ground rent income. For those of you living in blocks of this kind, you may be reassured to know that recent legislation has considerably restricted the ability of rogue freeholders to make these sorts of profits. This legislation has not been totally effective. It does provide for occupiers of blocks of flats to come together to have their managing agents changed, and there is a provision that all large maintenance and service contracts for such blocks must be put out to tender to at least three contractors. It has still proved possible for these provisions to be manipulated.

Finally, whilst I discourse on ground rents, can I remind you that leases do not need to be for 999 years. 125, 99 and occasionally shorter periods are not at all unusual. Such leases may have been created some time ago and therefore the date at which a lease expires is particularly relevant to its value. Where a purchaser is looking more to the reversionary value of his interest than to his current income, very different factors come into play. The valuation theories then are totally different and are more suitable for another article another month.

So much for some of the differences. I hope that my article has gone some of the way to helping you to understand the differing yields which various rentcharges provide, and thus hopefully to tailor to your own parameters that elusive personal maximum, but hopefully, successful bid.