Recent press reports have highlighted the growing problem faced by some purchasers of leasehold interests (particularly those in new build residential properties) due to the existence of onerous ground rent clauses.
11/05/2017
Recent press reports have highlighted the growing problem faced by some purchasers of leasehold interests (particularly those in new build residential properties) due to the existence of onerous ground rent clauses.
The contracts in question feature relatively high ground rents — which double every 10 years — opposed to the traditional 25-year period.
In addition, many leases also allow the landlord (usually the developer) to sell on the freehold interest to unrelated third parties. The terms of these leases have left many homeowners with the prospect of exponentially increasing ground rents, potentially affecting the leasehold value and onward saleability.
Current criticism
Developers are facing criticism on the basis that many new properties have been sold as leasehold without good reason, and that the onerous terms put leaseholders at a significant disadvantage.
Certain criticism has noted that some developers have treated freehold interests as tradeable investments, with little regard to the consequences for the leaseholder. Of interest to insurers, however, is an increasing number of professional negligence claims against solicitors for allegedly failing to advise clients as to the impact of ground rent provisions.
Claims against solicitors
Solicitors are duty bound to advise clients on contract terms and to ensure that the material provisions are understood.
In particular, solicitors should explain any:
Where a solicitor has failed to advise on — or sufficiently draw to a client’s attention — an unusual and/or onerous ground rent review provision in a lease, there is a risk that they will be found to have acted in breach of duty.
Individual cases will however turn on the extent and nature of the advice provided.
Redress schemes
Upon learning that its customers had been affected, one developer, Taylor Wimpey, apologised and announced a £130 million redress scheme for those affected by this issue.
The scheme is offered to:
It is unknown whether other developers will create similar redress schemes. However, solicitors presented with a complaint or claim should — in the first instance — direct claimants to the developer to make enquiries as to any available redress schemes, in mitigation of their potential losses.
Lender claims
Solicitors acting for lenders also owe a duty to advise them of any matters which might adversely affect the value of the property being purchased. This duty originates from the Council of Mortgage Lenders Handbook, which is usually incorporated into the terms of the retainer.
Specifically, under Clause 5.14.9, solicitors must report on any increase in ground rent which may “materially affect the value of the property”.
It is yet to be seen whether — in the event of a borrowers default — lenders will bring claims against solicitors for failure to draw onerous ground rent provisions to their attention.
Insurers should however be aware of the risk of claims where the value of a leasehold property has been adversely affected, resulting in a loss to the lender. This is of particular concern given recent press coverage that leaseholders have been unable to sell their properties due to:
Looking forward
Not only do punitive ground rent provisions have an impact post-completion, but lenders are also acknowledging the risks of lending against leasehold contracts which contain such clauses.
Nationwide, one of the United Kingdom’s biggest mortgage lenders has recently announced a change to its mortgage terms, with the consequence that it will not lend on properties if ground rent doubles every five, 10 or 15 years. Nationwide insist that ground rent increases are linked to inflation.
The Law Commission is also aware of the problems posed by ground rent clauses and recently told Solicitors Journal it was contemplating a review:
“Concerns about escalating ground rent are one of many issues in leasehold law that have been raised by stakeholders in our recent consultation on our next programme of work. We are considering whether to conduct a review of these issues as part of our next programme, and will be discussing that with government.”
Insurers should therefore be aware of the likely increase in claims against solicitors in respect of leases already subject to such clauses, especially from those purchasers who do not qualify for remedial schemes.
