I write about two separate subjects this month, although related.
The first item is about my Chartered Surveyor friend who, at a relatively tender age (we might even suggest in these modern times that he is still of “pre-middle age”) has now given up carrying out building surveys to spend plenty of leisure time on the golf course, and in his spare moments manages the portfolio of chief rents and ground rents which he owns and which substitute for a very good pension. The interesting thing is that by dedication over about ten years, he has got to the point where this income has cost him nothing apart from the very pleasurable task of collecting the money that is owed to him each year.
In retrospect, his idea was quite simple. If one buys a block of chief rents or ground rents at market prices, it can be quite easy to encourage some of the individuals who pay those rents to buy out that responsibility. Furthermore, since the annual need to make the payments is frequently considered a nuisance rather than a responsibility, they can usually be encouraged to pay anything between fifteen and twenty-five times the amount of the annual rent to cancel that responsibility for evermore. Those of you who have read and absorbed my previous articles will no doubt remember that even in these low-interest days these portfolios of rents can be picked up at between five and nine or ten times the total income.
My Chartered Surveyor friend, over the years, has been buying those portfolios, and once he has established his position as the person entitled to the annual payments he then encourages the owner-occupiers to buy him out. At the prices at which he was buying, when interest rates were higher, he only needed to sell about a third of the rents he was collecting to the owner- occupiers to cover his original cost of sale.
You might feel that is rather a piecemeal way of dealing, but when all is said and done, not all that difficult to do once you have bought the rents. On occasion he also picks up bonuses where covenants need amending (for a reasonable sum, he says) or where the ownership of the right to collect ground rents also gives him some possibilities of additional income in following and enforcing the terms of the ground leases.
I have only two special notes of warning, one from the present and one from the past. The conveyancing of the title to a chief rent to the owner-occupier is not a difficult one, but you will need to obtain the co-operation of a solicitor who is not too expensive. My second warning comes from experience a long time in the past, and concerns a company long in liquidation known as John Steel Limited. There the company proprietor bought annual rentcharges when the going price was between 18 and 20 times the annual amount (known in the profession as 18-20 YP). The company directors bought some very large portfolios and borrowed the money to do it.
They kept the rents for investment, rather than selling them on. In those days, owner-occupiers were not so keen to buy, and interest rates were relatively low, and the gearing produced a profit. However, as interest rates increased the interest and capital repayments increased, and the exercise was no longer viable. Furthermore, by then, as you will appreciate, the capital prices for the portfolios had come down as interest rates went up, and the company went to the wall. We see governments throughout the western world committed at present to low interest rates, but maybe we should not all forget that our economists and economics can go wrong before we all rush out to take advantage of the current low interest rates. Before I desert my rostrum for an afternoon of leisure at my surveyor colleague’s expense, I did want to discuss the terminology in relation to leases and rents.
FRI LEASES are commercial ones where the tenant not only accepts responsibility for paying rent, but is also responsible for all repairs, i.e. FULL REPAIRS and the cost of INSURING, hence the acronym. Where the tenant has lesser responsibility then he may well be occupying on an INTERNAL REPAIRING and INSURING lease ( IRI ).
Occupiers of property for their business have security provisions under the Landlord & Tenant Act 1954. Very briefly, subject to various conditions, these business tenants have security of tenure at the end of their lease. The landlord is entitled to a market rental value which in the event of dispute can be settled in Court or by the decision of a appropriately appointed Independent Chartered Surveyor.
In the domestic rather than business domain, where different legislation applies, tenants have interests under the Rent Acts and subsequent Housing Acts. They occupy on REGULATED, ASSURED or ASSURED SHORTHOLD TENANCIES . Very briefly, REGULATED tenancies only pay “a fair rent”. This rent is assessed by Rent Officers who have to assume that the supply of properties exactly equals the number of tenants looking for them. It is, as you will appreciate, neither a market rent nor fair. As more and more houses come on to the market, however, “fair rent” registrations by the Rent Officer are coming closer and closer to open market levels. Many houses and flats on these tenancies are bought at between 50% and 75% of vacant possession value by investors looking for appreciation when the tenants depart.
Tenants on Regulated Tenancies have security of tenure through three generations of the family if certain conditions are fulfilled. Domestic tenants on ASSURED tenancies have similarsecurity of tenure, but have to pay a market rental value which is less subject to Rent Officers’ supervision. Finally, ASSURED SHORTHOLD tenancies are any other domestic tenancies (since the early part of 1998) where the tenant is in occupation under a lease of more than six months at a market rent. The Landlord has the right to obtain a Court Order for possession after the tenancy has expired.
Other definitions include FLYING FREEHOLD, which is a freehold title of a property that is physically over or under another owned by someone else. The most obvious example of this would be a floor of offices in a block of offices, or a single flat in a block. Usually the division of such premises (dare I call them by the American term of “condominium”?) is conveyed by way of a lease, and then the ownership is frequently just called a “leasehold” interest. I suppose, to be consistent, those should also be called “flying leaseholds”, but I have never heard or seen the term used.
Also UNDERLEASE. Imagine you are the owner of a field about to be developed, which you own freehold. You decide not to sell the freehold of the field to the developer, but to lease it. The developer, in turn, builds houses or flats or shops, or whatever. Because he only has a lease himself, he cannot sell the buildings he has developed on a freehold basis but only leasehold. The underlease which the purchaser then takes will generally be at an increased rent, and will have to be for a lesser period - even if it is only by one day - than the term of the original lease to the developer. By a similar logic, a leaseholder or even an underlease-holder, can create a smaller title than his own, for a shorter period than his own, which is frequently, but need not be, at a higher rent. I suppose that in theory under-underleases could be created and even under-under-underleases, as the length of time the occupier is entitled to rent the property diminishes, but no-one seems to bother with such pedantic sophistication.
And now my responsibility to my readers is over for this month, my leisure afternoon can start. Maybe my colleague needs to celebrate another sale to another owner-occupier leaseholder!
The Secret Auctioneer