Paragon: Solicitors' failure to warn clients of hidden time bombs leads to wave of of professional negligence claims

Conveyancing solicitors and their indemnity insurers are facing an influx of professional negligence claims for failing to advise clients and mortgage lenders of soaring ground rent clauses on leasehold properties.

With several large developers selling new build properties as leasehold rather than freehold in recent years and redevelopment taking place in many areas, this has now become a country wide problem. Over four million homes in England are now leasehold properties.

Owners who bought their properties as recently as 2011 are finding themselves unable to sell their homes when surveyors establish a considerable difference in the value of the property with and without the onerous ground rent clauses. In a number of cases, developers have sold the leasehold of new-built houses on to investors who are asking vastly inflated sums from the owners.

To many solicitors, these ground rent clauses will often appear to be quite innocuous, especially as they can be found in standard lease contracts produced by large property developers.

For example, there are leasehold properties that have been sold on the basis of ground rent doubling at 10 year intervals or even less. These clauses purport to cover inflation. However, a ground rent of just £250 per annum will have risen to £2,000 after just 30 years which would be far in excess of inflation.

Some developers are including clauses in their leases 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.

Given the scale of the issue, some lenders are now insisting that the ground rent on a property must not be capable of being increased during the first 21 years and that the ground rent cannot ever rise to an unspecified amount.

There is an increasing lobby for greater protection for conveyancers and their clients, and the All Parliamentary Group on Leasehold and Commonhold Reform are debating new safeguards, but the problem will remain for some time. Until a change is brought in to eradicate profiteering by freeholders, it is up to solicitors to highlight onerous lease provisions to their clients and where necessary advise against the purchase of a property until the freeholder puts in place a reasonable scheme of ground rent rises.

To mitigate the potential risk resulting from historic matters and to protect themselves when advising clients in new matters, we advise conveyancing solicitors to consider taking the following steps:

1. Establish whether your 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.

2. Include a specific prompt to fee earners in your checklist/system to carefully check any rent review clauses. Where a formula is included in the contract, the fee earner should do the maths to ensure that the increases in ground rent will not be onerous on the leaseholder or negatively affect the future saleability of the property.

3. On lease extensions, check carefully whether the freeholder is trying to change the ground rent arrangements.

4. Check and record if ground rent payments are up to date. If not, record details of the arrears. Check what period is covered by the last demand.

5. Ensure you advise clients to pay ground rents on time and explain the penalties for missing ground rent payments.

6. Ensure you advise clients of any and all rent reviews and what they might mean to them in terms of their ability to secure a mortgage.

7. Where you feel you might lack the specialist valuation knowledge required to properly advise your client, it might be best to suggest they seek independent expert valuation advice before they commit to a purchase.

8. Some ground rents are set to rise with inflation. This sounds entirely reasonable at first sight, but it is worth checking whether this calculation is based on the Consumer Price Index (CPI) or the Retail Price Index (RPI).

9. Carry out an audit of closed leasehold purchase files from the last five years with a view to identifying potentially ‘high risk’ matters and to understand whether or not there is likely to be a problem. Depending on the size of the issue, consider how to deal with clients, landlords and lenders.

10. Do you have referral arrangements with builders or estate agents? Ensure your staff apply the necessary due care and attention when reviewing leasehold agreements. Whilst it is understandable that you do not wish to jeopardise these valuable agreements with introducers, consider the impact of a wave of negligence claims should your staff fail to make clients aware of onerous contract terms as well as your professional duties to act in the client’s best interests and not to compromise your independence.

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