Leasehold properties - Grounds for concern for solicitors?
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Leasehold properties - Grounds for concern for solicitors?

Mar 6 2017

The question is often asked by law firms undertaking conveyancing work 'why are we paying so much more for our PII than other firms who don't'?  The answer is that issues keep popping up to trouble insurers, often unexpected.

Two recent developments causing concern for insurers involve leasehold properties. 

Firms may have a potential claims exposure if they have not identified and advised on the following matters:

 

Potential Claims Issue:  Failure to pay Ground Rents

An issue has been brewing since the Housing Act 1988 (The Act) came into force in January 1989  - however the potential problem has only recently been recognised.  The issue surrounds the buying of a leasehold property where the ground rent is, or will during the lease be £250.00 or more (£1,000.00 or more in London), meaning that the lease will therefore fall within the provisions of The Act and become an assured tenancy. 

The problem arises, in part out of the wording of Ground 8 in Part 1 of the Second Schedule to The  Act,  which determines that where x rental payments are missed in a given period, the Court must, without discretion, terminate those leases and award possession of the property to the freeholder. It is clear then that any issue could potentially affect hundreds of thousands of leases.

 

Potential Claims Issue:  Increasing Ground Rents clauses

Taylor Wimpey has received significant negative publicity recently for its incorporation of leasehold clauses imposing significantly escalating ground rent charges.  They are not the only developer to have taken advantage of this opportunity for a surreptitious additional income stream.  

CML Handbook Reporting requirement

A solicitor owes a duty of care both to the purchaser and lender, if any, to report on any matters affecting title or the value of the property, as reflected in Part One of the CML handbook which provides instructions for conveyancers acting on behalf of lenders in residential conveyancing transactions.

Clause 5.6.1. of the Handbook states  under the heading 'Good and Marketable Title', that the “title to the property must be good and marketable free of any restrictions, covenants, easements, charges or encumbrances which, at the time of completion, might reasonably be expected to materially adversely affect the value of the property or its future marketability ……… and which may be accepted by us for mortgage purposes”.

Therefore, if ground rents are not paid OR leases contain 'unusual' clauses for the increase of ground rents, conveyancing solicitors will be under a duty to report, both to purchaser and lender.  However, it is believed that these issues have not been reported, either because firms have missed the issue or not understood its importance.  

Some lenders have certainty seen this issue as a real concern and have insisted upon additional requirements prior to lending. Examples of these additional requirements include:

  • The ground rent must not be capable of being increased during the first 21 years
  • The ground rent cannot be open-ended i.e. it must not be capable of being increased to an unspecified amount.

 

It has also been reported that lenders have begun to refuse to lend where ground rents are due to increase significantly over future periods.

So how should conveyancers deal with the issue now?

 

Risk Mitigations

Historic files

  • Provide a 'Property Law Bulletin' to existing clients alerting them to the risks regarding
    • non-payment of ground rent; and
    • onerous ground rent provisions

           and prompting them to get in touch if they have any concerns.

  • Undertake an audit of any potentially 'high risk' files involving leasehold property interests.  You may be able to identify transactions involving new-build housing developments and audit a sample to identify whether or not there is likely to be a problem regarding punitive ground-rent provisions.

 

New matters

  • The first, and simplest, solution is to specifically advise all clients at the outset to pay ground rents when due and inform them of the penalties for not doing so. 
  • Where a lender is involved also inform your client that you will be writing to the lender to advise of the situation.
  • Amend or add letters to solicitors acting for the freeholder to your precedent bank, pointing out the issue and flagging that amendments are required to the wording of the lease.  
  • Be aware, where a client is facing forfeiture of a lease, that relief from forfeiture can be granted but the amount due in arrears must be paid.
  • Include a specific prompt for fee-earners to check leases for the wording of ground rent clauses/increase provisions as part of your transaction checklists.
  • Once the potential size of the issue is known, develop a strategy for dealing with clients, landlords and lenders. Each of these will have differing primary concerns.
  • Circulate this warning note to conveyancing fee-earners and follow up with departmental training.

 

The Bold Legal Group (BLG) have obtained a legal opinion on the matter which has been made available to BLG members.  For more information on the BLG, visit their website: http://www.boldgroup.co.uk or email Rob Hailstone; rh@boldgroup.co.uk 

Related Resources

The Housing Act 1988 (ref Section 1, Schedule 1 & Schedule 2)

Artesian Residential Investments Ltd v Beck  [2000] QB 541

 

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