Ground rent risks – 12 months on
In an article for Estates Gazette dated 31 July 2017, we identified the potential for claims against professionals where they failed to consider the implications of the ground rent provisions in new-build leasehold properties. What developments have there been since then?
Last year, housebuilders and developers came under increasing pressure for the "unfair practices" of selling new-build houses and flats on a 'leasehold' basis, with high ground rents that could double every 5, 10 or 15 years.
In December 2017, the Government released the results of its consultation on 'Tackling unfair practices in the leasehold market'. It made clear that the automatically increasing ground rents were "designed to serve the commercial purposes of the developer and any future investors" and that "leaseholders see no material benefits from these payments". The consultation included plans to introduce new legislation to prohibit new residential long leases being registered on houses, whether new build or existing freehold, as well as introducing a cap of £10 per annum on ground rent.
Since then, solicitors carrying out residential property work, licensed conveyancers and other professionals appointed on behalf of purchasers and their lenders, who failed to adequately advise their clients about any increases in ground rent, have been facing potential negligence claims.
Where are we now?
The first wave of claims is expected to hit conveyancers shortly before Christmas, with law firm FS Legal having confirmed it is in the process of preparing Letters of Claim for 500 leaseholders seeking compensation from conveyancers. Given the numbers of potential claimants, it is likely we will see further 'waves' of claims, or even group litigation.
That said, the volume of claims brought against professional advisers could potentially be less if purchasers are able to recover compensation through redress schemes. For example, in April 2017, Taylor Wimpey announced it had made a £130m redress provision to cover disputes over leases taken out by customers that have left some of them with a doubling ground rent.
Solicitors and Licensed Conveyancers are not the only ones who should be concerned about the growing number of claims in relation to ground rent provisions. Whilst they appear to be the first professions to be targeted, claims against surveyors and valuers may also follow, especially in cases where the ground rent provisions in leases have left homeowners (and lenders) with properties that are worth significantly less than what was originally advised.
Where do we go from here?
Under the proposed new legislation, it will not be possible to register a residential long lease or any lease over 21 years with a ground rent in excess of the statutory cap of £10 per annum at HM Land Registry.The Government is now running a second consultation for six weeks from 15 October 2018 to focus on how to implement the intended reforms.
Whilst the proposed legislation is welcome, it is unlikely to come into force before 2020 and, in any event, the issue will not go away, as it will only affect new properties. Accordingly, professionals who advise leasehold purchasers and lenders should, if they have not already, review their practices and procedures to ensure that proper advice about ground rents is given.
For more information please contact Malcolm Rogers, Senior Associate Malcolm.Rogers@dwf.law
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.