“Leasehold scandal” – Law reform and defence of claims against solicitors

This article was co-authored by Catherine Phillips, Litigation Assistant, Taunton office. 

Introduction

Unrest amongst leaseholders has gained traction since 2017, igniting a media campaign dubbed “the leasehold scandal”. A number of tentative claims by leaseholders against their conveyancing solicitors relate to an alleged failure to advise in respect of the impact of ground rent liabilities upon the value and future marketability of leasehold properties. We have seen these claims grow steadily both in volume and complexity in the last couple of years.

But is there a valid basis for these claims?

We have previously considered the long term effects of onerous escalation clauses and the extent to which these might be said to affect a solicitor’s duty to advise. The landscape of leasehold ownership continues to evolve and reports issued by The Competition and Markets Authority on 28 February 2020 and the Law Commission on 21 July 2020 outline a way forward for leaseholders.

And so we ask, what is the impact of these developments on the extent of a solicitor’s duty and what does the future hold for the defence of such claims?

Competition and Markets Authority Report

In its report dated 28 February 2020, the Competition and Markets Authority (CMA) addressed the impact of onerous ground rent clauses upon leaseholders.

The CMA raise significant concerns regarding the role of developers in mis-selling leasehold houses and misleading prospective buyers. Leaseholders were frequently advised that the freehold would be available for purchase following two years of ownership and quoted a reasonable sum only to find that, during the two year period, the freehold had been sold to a third party and the premium required to purchase the freehold had increased significantly.

The Consumer Protection from Unfair Trading Regulations 2008 (CPRs) provides protection against unfair commercial practices which distort decision making or mislead consumers. However, the purpose of consumer law is to protect against unfair contract terms, not onerous terms. In order for leaseholders to benefit from the protection of consumer law, they must be able to prove that the lease term is fundamentally unfair.

Competition and Markets Authority press release

On 4 September 2020, the CMA released their conclusions following investigations into the practices of the big four developers - Taylor Wimpey, BDW, Persimmon and Countryside Properties.

The CMA identified a troubling history of mis-selling, misleading and the inclusion of unfair lease terms. Most significantly, the CMA noted a failure by developers to “explain clearly exactly what the ground rent is, whether it increases over time, when increases will occur and by how much” at the point of sale.

Enforcement action is to be taken which will require the overhaul of current practices with court action to be taken for non-compliance and, whilst only four developers were targeted for investigation, the implication is that the findings and subsequent action will apply to developers across the board.

In order to address the issue of freeholds being acquired by third parties, the CMA further intends to take enforcement action against third party investors who fail to make benign any onerous lease terms upon acquisition of the freehold.

The CMA press release will undoubtedly affect ground rent claims against solicitors as the spotlight falls on conduct at the point of sale and pressure is exerted on developers and freeholders to remedy the negative impact of their conduct on leaseholders.

Law Commission Report

The Law Commission Report focusses on the promotion of transparency and fairness during the enfranchisement process and obtaining a better deal for leaseholders.

At present, owners of leasehold houses and flats have different enfranchisement rights. The Law Commission considers there is no legitimate reason for differentiating between the different types of leasehold ownership. It therefore proposes a uniform right for all qualifying leaseholders to obtain a lease extension of 990 years at a peppercorn rent.

In addition, the right to collective enfranchisement is set to be extended. Collective enfranchisement cannot be sought where more than 25% of the property is non-residential. The intention is to increase this to 50%, allowing more properties to qualify. The extension of rights will also allow for the collective enfranchisement of multiple properties. This is particularly relevant in cases where a property forms part of an entirely leasehold estate or development.

Allowing more properties to qualify for enfranchisement may encourage claimants to depart from unrealistic claims against solicitors for diminution in value and opt for the enfranchisement route which is often a more complete and cost effective remedy for both parties.

Comment

The condemnation by the CMA and the Law Commission of the unfair practices of some developers is clearly stated and a marker has been laid down that they must take substantive steps to remedy the injustices caused to leaseholders. This will include stricter control of the premiums which can be charged for purchase of freeholds and generally enabling leaseholders to enfranchise more easily and cheaply.

Significantly for solicitors, there is increased scope for them to assert that claimant leaseholders should redirect claims in professional negligence towards the relevant developer or freeholder. We await further developments with interest.

Read other items in Professions and Financial Lines Brief - October 2020