“Unfair leasehold practices,” such as doubling ground rents for new build leasehold homes have recently been the subject of much criticism, both in the media and politically. This was the start of the trilogy, followed by the second instalment where we saw the publication on 21 December 2017 of the Government’s response to a consultation on this issue. The final part of the trilogy is eagerly awaited (although likely to be delayed by the focus on Brexit).
What, if anything, are the likely implications for conveyancers and their professional indemnity insurers?
The leasehold model has existed for centuries, and works well where there are common parts to a property, such as a block of flats. Since the mid 1990s, developers of residential housing began to use leasehold ownership more widely. Sometimes this was with good reason, such as where the development was mixed between flats (normally long leasehold) and houses (normally freehold) - selling the houses leasehold enabled a uniformity of approach about the maintenance and appearance of the development into the future. However, in recent years there has been a rise in the sale of new build leasehold houses with no shared facilities and no obvious reason why the freehold was not sold at the outset. It is with these properties in particular that problems have begun to emerge which, in the last 12 months, have become a significant national housing issue.
The first and major issue arising from these properties is escalating ground rents. Ground rent is an annual payment due under a lease from leaseholder to freeholder, in recognition of the (nominal) value of the freeholder’s interest in the land. Historically, ground rent was either a “peppercorn” (which in effect means no monetary payment at all), or a small sum of say £50 or £100 per annum. Leases where the ground rent is a sum of money usually include some form of mechanism for reviewing the ground rent. The problem arises from the recent trend for the ground rent to be increased significantly on review, and for the reviews to be more frequent than before. The issue is more acute when linked to affordable housing.
Typically in affected leases, the ground rent will double every 10 years, which may have a greater impact than the purchaser previously realised. For example: an initial ground rent of £295 per annum sounds reasonable, but if the ground rent doubles every 10 years, after 30 years the ground rent payable is £2,360 a year, an increase of 700 per cent. The properties affected are often low value or starter homes, which increases the disproportionality of the increased ground rent. The size of this higher ground rent alone may deter subsequent purchasers, and, as ground rent is a factor in the calculation of the premium payable under the statutory enfranchisement procedure, will significantly increase the premium required to purchase the freehold.
The effect of these issues should not be underestimated: there is the real risk of properties affected by such lease terms being blighted. For example, since May 2017 Nationwide Building Society has refused to lend on properties with doubling ground rents – leaving leaseholders with a potentially un-mortgageable and unsaleable asset.
The second issue with these properties relates to provisions in the lease requiring the leaseholder to seek consent from the freeholder to make changes to the property. This in itself is not an issue, but some freeholders are requiring disproportionately high premiums to give their consent - in one case the freeholder is said to have required a premium of £3,000 just for confirming their agreement for the leaseholder to build a small extension to the property.
In response to these issues, the Government launched a consultation: “Tackling Unfair Practices in the Leasehold Market”, which closed for comments on 19 September 2017. This was mainly focused on addressing the issue of ground rents in new leasehold properties, and related issues such as protection for freeholders with service charge covenants.
The Government’s response (published on 21 December 2017) includes a pledge to prohibit new residential long leases on houses, whether new build or existing, and to restrict “newly established” leases of house or flats to a peppercorn. There is no stated target time, and with the current Government focus on Brexit, this review is unlikely to reach a rapid conclusion. These provisions will not apply to existing leases, where the Government’s aim is to a) work with developers to see existing compensation schemes extended, including to second hand buyers, and b) provide information to enable purchasers to seek redress, including “where their conveyancer has acted negligently”.
As the Government’s response recognises, some developers or freeholders are tackling the problem themselves. Taylor Wimpey set aside a fund of £130 million, specifically to assist leaseholders of their developments whose leases have ground rents that double every ten years. However, this won’t solve all of the issues, such as the high premiums payable for consent, and significantly this fund is only available to leaseholders who bought their lease from Taylor Wimpey direct. Where a property has been sold on (which will often be the case), no help is offered.
Also, very often the developer will have sold the freehold on to a third party. Taylor Wimpey say they have reached an agreement with most of the successor freeholders, but there is no obligation on those freeholders to agree, and other developers may not be able to make similar arrangements. The Government’s approach may improve the position of these “second hand” buyers, but there are few details available, and the proposals assume significant voluntary compliance by developers. This could still leave a large group of leaseholders without remedy, at least in the short term, and these may well still be advised to contact the conveyancer who acted for them.
Risks for conveyancers
Unsurprisingly, some leaseholders are looking for other forms of redress, and the obvious target is the conveyancer who acted for them when they bought the leasehold property. They are encouraged in this by entities such as the Leasehold Knowledge Group (LKG). As well as campaigning vigorously on leasehold issues, the LKG has recently advised affected leaseholders not to accept any offer from a developer without taking advice as to how this might impact on any claim they may have against their solicitors. There is further support for this from the Government’s response, although it is encouraging that the primary focus seems to be on the developers providing solutions. However, the combination of an unknown timeframe, a voluntary scheme and positive encouragement in some quarters to pursue professionals, means a wave of claims against conveyancers is still likely, if not inevitable.
It is difficult to put a number on how many people have been affected by these issues. In 2016, around 57,000 leasehold houses were sold and out of those approximately 10,000 were new build leasehold houses; however, there are no figures available as to how many of those leases might include potentially onerous rent review or other clauses. Even if only a quarter were affected, that is potentially 14,250 claims for just one year of transactions. A combination of longstop limitation and the three year “discovery date” means claims could be made in relation to transactions within the last 15 years.
It remains to be seen what claims will follow, and if so, how they will be put. Equally, the terms of the ground rent review are not usually complicated and are likely to have been brought to the attention of the purchaser. Our view is that law firms are likely to be seen (unfairly) as a potential scapegoat (with a particular focus on the adequacy of the advice about the ground rent review clause) and caution will be needed when responding to any such claims. The implementation of the Government’s response will be highly significant. Mortgage valuers may also have an exposure.
Causation is also likely to prove contentious. While the reality is that many first time buyers, desperate to get on the property ladder and only just able to afford the property, are unlikely to be swayed by advice about the value of the property many years down the line, proving this will be difficult.
What to do?
What should insurers and conveyancers do? In a sense, the horse has bolted and all conveyancers can do is ensure that going forward the usual care is taken when advising clients on such issues. Insurers will want to know about the types of transactions conveyancers deal with (such as multiple plot purchases) and to work with their policyholders around risk management issues that arise in this arena. Now is not the time to panic, and if we find claims coming forward, it is envisaged that breach of duty and causation will prove to be robust defences in the majority of cases. It is hoped that the combination of the implementation of the Government’s response, and developers responding appropriately, will mean that the last instalment of the trilogy is one which insurers will want to read.