Firms under the hammer by Janine Parker, Paragon
This article was originally featured as a column in the June issue of LPM. To read the issue in full, download LPM.
Conveyancing solicitors and their indemnity insurers face a potential influx of professional negligence claims for failing to advise clients and mortgage lenders of soaring ground rent clauses on leasehold properties. Several developers sold newbuild properties as leasehold rather than freehold in recent years – and now over 4m homes in England are leasehold properties.
Many owners are unable to sell their homes because surveyors are finding considerable differences in the value of properties with and without the onerous ground rent clauses. In several cases, developers sold the leasehold of new-built houses to investors who are now asking owners for vastly inflated sums.
To many solicitors, these ground rent clauses will appear innocuous, especially as they can be found in standard lease contracts. For example, there are leasehold properties that have sold because of ground rent doubling at 10-year intervals or less. These clauses purport to cover inflation, but a ground rent of just £250 per annum will have risen to £2,000 after just 30 years – far in excess of inflation.
Some developers are including lease clauses stating that ground rent would increase at a percentage of the rentable value of the property. Solicitors dealing with commercial conveyancing will have come across this, and these types of clauses have found their way into residential conveyancing.
Some lenders are now insisting that the ground rent must not be allowed to increase during the first 21 years and that ground rent can’t rise to an unspecified amount.
What can firms do to mitigate their exposure? First and foremost, they should establish whether conveyancing staff are suitably experienced to assess ground rent clauses. All staff handling conveyancing need to be made aware of the issue and know what to look out for to spot onerous contract terms.
Prompting fee earners to carefully check any rent review clauses will assist in the future, and check and record if ground rent payments are up to date. If not, record details of the arrears and check what period is covered by the last demand.
Where a formula is included in the contract, fee earners should ensure that the increases in ground rent won’t be onerous on the leaseholder or negatively affect the future saleability of the property or lease extensions and check carefully whether the freeholder is trying to change the ground rent arrangements.
Always make sure clients are aware of their obligations to pay ground rents and the implications of any future increases. For example, some ground rents are set to rise with inflation and it’s worth checking whether that’s based on the consumer price index or the retail price index.
Finally, if there are any closed files from the past seven years that you think may be high risk, then a review or audit is recommended. Ensure staff apply the necessary due care and attention when reviewing leasehold agreements. While it’s understandable that firms don’t wish to jeopardise valuable relationships with clients, landlords, lenders or introducers, you must consider the impact of a negligence claims wave should your staff fail to make clients aware of onerous contract terms. At all times, remember the professional duty to act in clients’ best interests and not compromise independence.