Arrassey Properties Ltd v Nelsons solicitors: The future of ground rent claims

Update – 7 November 2023: The Leasehold and Freehold Bill

King Charles has announced that a Leasehold and Freehold Bill will ban leaseholds for new houses, but not new flats, in England and Wales, and will increase the standard contract lease extension from 90 years to 990 years.

There is also a plan to consult on the capping of all ground rents on existing leasehold properties to a “peppercorn” rate, in order to protect leaseholders from making unreasonable or excessive payments.

The Bill follows on from the Leasehold Reform (Ground Rents) Act 2022, which put an end to ground rents for new, qualifying long residential leasehold properties in England and Wales.

The ground rent cap is likely to assist those who cannot extend their lease (financially or because of their existing lease term) and so the sooner some clarity is provided around this, the better.

The Leasehold Reform Act (Ground Rent) 2022 abolished escalating ground rents for most new residential leases but offered no recourse for existing leaseholders. Claims brought by existing leaseholders therefore persisted, placing significant strain on court resources, as outlined in our previous article. Absent any binding precedent or judicial commentary in this emerging area of law, parties hit an impasse as neither side were able to provide authorities in support of their positions.

The matter of Arrassey Properties Limited V Nelsons Solicitors (A Firm) [15.07.22] provides a crucial and much anticipated piece of judicial commentary.

Background

In 2007, Arrassey Properties Limited (Arrassey) purchased four residential leasehold flats in East London. Nelsons Solicitors (Nelsons) acted for Arrassey in the transactions.

Ground rents of £250 were payable on three of the flats and the fourth required an annual ground rent of £350. The leases all contained the same rent review clause which provided that the ground rent would increase every ten years by the greater of:

150%, or;
The RPI published for the October before the review date (the Escalation Clause).

In its reports to Arrassey, Nelsons set out the Escalation Clause and confirmed that the terms of the lease were acceptable. Nelsons did not provide any advice in respect of the nature of the clause, or the potential impact it may have on marketability or mortgageability of the property in the future.

Arrassey submitted that the Escalation Clause was highly onerous and that, even in periods of low RPI inflation, the ground rent payable would quickly become excessive and disproportionate by virtue of the 150% increases. By the tenth review, the ground rent would be over £9,600 per annum and by the end of the lease, ground rent of over £4.2 million per annum would be payable. Arrassey asserted that Nelsons ought to have informed and advised them of the hazard and that its failure to do so constituted negligence.

In lay witness evidence, Nelsons said: “I did not consider the ground rent or the ground rent review provisions in the sub-leases to be unusual, unreasonable or onerous in December 2006, nor was it possible for me to speculate on what the attitude of lenders or purchasers might be in the future. Obviously, the requirements of lenders and the attitude of purchasers can change over time”.

Nelsons submitted that by drawing the clause to the Arrassey’s attention, it had provided sufficient advice and that it was not required to give advice in relation to inflation in a hundred or 240 years’ time.

Judgment

HHJ Baucher was satisfied that the ground rent provisions were not onerous in the context of a 2006 lease, notwithstanding the increases of at least 150% every ten years.

Given that the professional reputation of a solicitor was at stake, HHJ Baucher also considered whether Nelsons should have done more than simply summarise the clause and direct Arrassey to the relevant provision. Arrassey sought to rely on SRA guidance notes dated 14 February 2022 titled: “Providing competent advice”, as evidence that Nelsons had fallen below the relevant standard of care.

The only guidance available to Nelsons at the material time however was the 13th edition of the Law Society’s Conveyancing Handbook which simply said: “In long residential leases, fixed increment reviews every 25 to 30 years are more usual”. HHJ Baucher found that, self-evidently, there was no reference in the handbook to the need to explain the effect of the Escalation Clause.

The SRA Guidance relied upon by Arrassey was not issued until January 2022, some 14 years after the transaction, following concerns that clients were not receiving appropriate advice. HHJ Baucher found that Arrassey’s reliance upon the 2022 Guidance amounted to an attempt to fix Nelsons with the benefit of hindsight, which it was not entitled to do.

Handing down judgment in favour of Nelsons, HHJ Baucher stated: “I am not persuaded that at the material time [Nelsons] was required to do more than [they] did. [They] set out the provision in the lease and asked the claimant to consider it. I am not satisfied that a reasonably prudent solicitor in 2006/7 was required to do more. In my view, in reporting on the title as [they] did, [Nelsons] met the requisite standard at the material time and therefore was not negligent”.

Comment

The judgment in Arrassey is welcomed because it addresses the two key questions which are central to ground rent claims:

Was the escalation clause onerous?
If so, was the solicitor under a duty to advise on its nature and future impact?

Here, the court found both fixed and RPI-linked increases to be acceptable. Consequently, claimants are now likely to face an uphill battle to establish that escalation clauses of this nature were onerous before 2017. If the clause is deemed reasonable, there can be no duty to advise otherwise, and therefore the claim necessarily fails at the first hurdle.

If claimants are able to establish that the escalation clause is onerous, they must still persuade the court that the solicitor had a duty to advise in respect of its implications. Crucially, the court in Arrassey assessed the standard of care to be that of a reasonably competent solicitor in 2006/7, with reference to the information and guidance available at that time. Claimants are therefore unlikely to establish a duty to advise in transactions pre-dating 2017, when the controversies first emerged.

Solicitors must however be mindful that the Arrassey judgment is not binding precedent but can be relied upon as a persuasive authority in future cases. It must also be noted that Arrassey deals with a limited set of facts and so the judgment does not necessarily impact each and every case, particularly those post-dating 2018 or featuring very complex escalation clauses.

Arrassey is in the process of appealing HHJ Baucher’s decision and so solicitors should be mindful that, whilst the decision at first instance is both encouraging and arguably reflective of the state of knowledge in the conveyancing profession pre-2017, it may be reversed by the High Court.