Leasehold scandal: defending “ground rent” claims against solicitors

The problems faced by some purchasers of leasehold interests continue, due to the existence of onerous ground rent clauses. We are seeing an influx of claims alleging that the purchasers’ solicitors’ have breached their duty of care for failing to advise on the adverse effects of the ground rent clause in the relevant lease.

Potential problems

We have previously considered the potential problems caused by unusual or onerous ground rent clauses, including:

  • Affordability for the lessee
  • Impact on the value of the leasehold interest
  • Lenders’ refusal to lend on property purchases where the ground rent is liable to escalate to a level that renders the lease difficult or impossible to sell.

An additional problem is that some freeholders (who have bought the freehold as an investment) are often charging substantial sums to sell it back to the leaseholder. This means that the cost of buying the freehold or extending the lease can become unaffordable.

These problems can all lead to potential claims against the purchasers’ solicitors.

Liability

“Doubling” ground rent clauses (and hybrid clauses which include doubling of ground rent) are deemed to be unusual and onerous. It ought therefore to be apparent to a solicitor that the ground rent would become excessive and so may affect the value and marketability of the lease. Consequently, a solicitor owes a duty to explain how the ground rent escalates, that such escalation may affect the resale of the lease and therefore it should be recommended that the client takes advice from a valuer before purchase.

Whilst a lease that provides for RPI-linked reviews is not in itself onerous or unusual, this will depend on how frequent the reviews are. The UK Finance Mortgage Lenders’ Handbook contains individual lenders’ specific requirements regarding ground rent. Lenders are generally comfortable with rent reviews linked to RPI but will often require doubling ground rents to be referred back to them for review.

Liability is always case specific, however where a solicitor fails to advise on such a clause, there is a significant risk they will be found to have breached their duty of care.

Causation

In all ground rent cases, the claimants will have to show that the negligence caused them a loss that they would not have suffered if they had been properly advised.

In many cases, it will not be possible to disprove a claimant’s contention that they would not have proceeded with the purchase, save where there is actual evidence on the causation issue that would serve to refute it.

Assured Shorthold Tenancy

Further problems arise where the ground rent exceeds (or will in due course exceed) £1,000 p/a in London, or £250 p/a elsewhere. If this happens, it will fall within the ambit of the Housing Act 1988 and become an Assured Shorthold Tenancy (AST). This creates risk for the leaseholder as it enables the landlord to repossess the property in certain scenarios.

Mitigation

It will usually be possible for claimants to bring their liability for the ground rent to an end altogether by acquiring the freehold of houses under the Leasehold Reform Act 1967. In the case of flats, they can acquire a new lease at a peppercorn rent under the Leasehold Reform, Housing and Urban Development Act 1993.

It would be the cost of so doing (the premium payable and the legal costs of the process) or of negotiating a variation to lease, where one can be agreed, which is likely to be the starting point for calculating the loss.

Signs of change

The government’s consultation ‘Implementing reforms to the leasehold system’ looked at how a number of measures to tackle unfair practices in the leasehold market should work in practice.

The subsequent “Public Pledge for Leaseholders” requires the signatories (currently some 63 developers and freeholders) to pledge to:

  • Identify leases within their portfolio, which contain a clause whereby ground rent doubles more frequently than every 20 years
  • Contact leaseholders to inform them and offer to amend this to a clause linked to the RPI
  • Assist any leaseholder who approaches them to request such a doubling clause be reviewed, even if they have not previously taken up an offer of variation
  • Not insert into any future lease agreement a clause whereby ground rent doubles more frequently than every 20 years
  • Take all necessary steps to ensure a potential leaseholder is advised of all relevant costs associated with the lease before the lease is signed.

Comment

Only time will tell whether the 63 developers and freeholders will deliver on the pledge but, in the meantime, insurers will continue to see claims when purchasers discover that they have signed up to onerous clauses without having received adequate advice. 

This article was co-authored by Amy Childs, Legal Apprentice, Taunton

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Read other items in Professions and Financial Lines Brief - September 2019