Described by the press as a “scandal” and as “the biggest legitimate scam in Britain” by one commentator, practitioners should be concerned that a new spate of claims relating to long leasehold transactions is brewing.
Onerous rent review clauses
The so-called scandal is the inclusion of onerous rent review provisions in leases of new build properties by some of the larger national developers. Traditionally, the ground rent in such leases is nominal; however, whilst the initial ground rent in many leases seems insignificant (e.g. GBP 250 p.a.), onerous periodic rent review provisions incorporated by many developers can leave the tenant facing a ground rent liability of many thousands of pounds even just a few years into the term.
A typical example is a 999 year lease with an initial ground rent of GBP 500, doubling every five years. This will start causing problems to anyone looking to sell the property after 15 years, by which point the yearly demand of GBP 4,000 will be a headache that no prospective purchaser will particularly enjoy. However, when that purchaser looks further down the line, they will see a rise to GBP 32,000pa within a further 15 years (ie 30 years from the original lease), by which point the property will effectively have become totally unsellable.
The lender may also have a complaint if not advised of onerous rent review provisions. The CML Handbook commonly requires solicitors to report to the lender “any increase in the ground rent may materially affect the value of the property” (paragraph 5.14.9).
Conveyancing solicitors that haven’t advised on this issue (which may be – and often is – buried deep in the lease documentation) can expect to receive a significant claim, with little available by way of mitigation or defence.
Needless to say, this issue is proving to be deeply unpopular among the house-buying public and there is mounting political pressure building on national developers to change their lease provisions. Many have now stated publicly that they are reviewing their leases and will not include these so-called ‘blue dolphin’ clauses in their standard leases in future. However, for many practitioners, the potential damage to their claims record has already been done. With the groundswell of opinion over recent months, the Government has now responded with proposals.
Unintended conversion to assured tenancies
Another emerging risk to residential conveyancers that follows on from the above is the possible application of the Housing Act 1988 (and particularly the Assured Shorthold Tenancy provisions) to long residential leases. These provisions are really only aimed at short leases and give landlords significant powers if any sums that are due under the lease go unpaid. In the worst cases, landlords can forfeit the lease.
The Housing Act provides an exclusion for leases where:
- The annual ground rent is below a certain level (currently GBP 1,000 p.a. in London and GBP 250 p.a. elsewhere); and
- The tenant is in occupation.
So, historically, the vast majority of long leaseholds have fallen outside of the Housing Act. However, due to the prevalence of the sort of rent review provisions mentioned earlier in this note, many long leasehold properties are now starting to fall within the Act’s remit as ground rents rise.
The ramifications of this could potentially be disastrous; if any of the significant ground rent goes unpaid or if a tenant dies whilst in occupation, a landlord could potentially obtain possession of the property, thus depriving any lender of its security and the tenant (or his estate) of the value of a property often marketed as a ‘virtual freehold’. The resulting claim against the conveyancing solicitor is both obvious and shocking.
As this is an issue which has only recently come to light, it remains to be seen how the Court would approach an application by the tenant or the tenant’s estate for relief. We could see another group action similar to the “Right to Buy Litigation” of 2015.
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Special thank you to RPC for their contributions to this article.
For more information contact Martin Ellis, Head of UK Professions and Legal Practices Group on +44 20 7528 4704 or email email@example.com