Solicitors who failed to warn of soaring ground rents on leasehold properties face a wave of claims for professional negligence, following Guardian Money revelations on a scandal that has engulfed thousands of unwitting homebuyers.
Many have been unaware that the ground rent on new-build leasehold properties they have bought can escalate dramatically in future years following the introduction of new clauses in which it doubles every decade. Although most housebuilders have switched to a new formula of increases based on RPI, some people are finding that the new-build home they bought as recently as 2010 is virtually unsaleable.
But a lifeline has emerged for distressed buyers in the form of the Council of Mortgage Lenders handbook, which is meant to guide the process of conveyancing. Graham Balchin of solicitors Carter Lemon Camerons says: “It is a requirement of most lenders [see the CML Handbook section 5.14.9] that the lender is informed of any increase in the ground rent that may materially affect the value of the property. If the conveyancing solicitor fails to warn the purchaser, and any lender providing a mortgage secured on the property, that the lease terms may adversely affect the value of the leasehold property, they may be liable in negligence.
“I have acted – and am currently acting – for a number of flat owners who have suffered substantial loss as a result of purchasing leasehold property with onerous ground rent clauses. In those claims we have been able to recover compensation from the solicitor.”
Balchin adds that the insurers for solicitors, who cover the cost of professional negligence claims, have accepted that a doubling of the ground rent every 10 years is an “onerous term”.
Money has also been contacted by Myles Hickey of solicitors Dowse & Co, who also suggests householders claim for professional negligence. In one case Hickey handled the client was on the hook for an increase in the initial £400 annual ground rent to an extraordinary £409,600. “It is scandalous that the solicitors acting for the leaseholders failed to pick up this glaring problem before contracts were exchanged. I would suggest that failure to alert a buyer to the risks they face from periodic doubling of ground rent is obvious professional negligence,” he says.
Some of the cases seen by Balchin are remarkable. “I was approached by someone who had bought a home in south-east London 20 years ago for £150,000. Since then the ground rent has gone up to £32,000 a year. A clause in his lease said the ground rent would increase to a percentage of the rentable value of the property. It’s something you see in some commercial leases, but not normally in residential. It was very well hidden and no one paid attention. It started at £50 a year, or 1% of the sale price, or 60% of the rentable value, whichever is higher. An experienced conveyancer would have understood it and advised the buyer. But most conveyancing is done by pretty junior people who don’t realise just how onerous these terms are.”
Many young buyers are encouraged by developers to use solicitors for conveyancing recommended by them, who then fail to warn the buyer of the onerous ground rent clauses.
Balchin says: “Estate agents are also to blame. They will recommend solicitors who will make the sale happen because the agent wants to get their commission. The agent, of course, is acting for the seller and can try to conceal just how high the ground rent is. In one case I was told of the agent saying the ground rent was just £27 per month, rather than £350 a year. That makes a very high figure for a flat in Nelson, Lancashire, sound quite reasonable. They don’t mention that the ground rent doubles every 10 years.”
Balchin points out that leasehold house buyers find themselves in a worse position than flat buyers. If a developer such as Taylor Wimpey sells the freehold of a block of flats, it has to offer the leasees a right of first refusal. But owners of leasehold homes have no such right. This explains why buyers of new-build houses have contacted Money after discovering that only a couple of years later the freehold on their home has been sold to another company without their approval. Buying the freehold can then become very expensive.
Balchin says he seeks compensation from the leaseholder’s conveyancing solicitor based on a surveyor’s valuation of what the property would be worth with and without the onerous ground rent clauses. But he warns that leaseholders need to begin legal action sooner rather than later: “A claim must be brought within six years of exchange of contracts.” Unfortunately, many people don’t realise until they come to sell, which can be too late. Ground rent clauses which rise linked to RPI are less likely to succeed as a claim than ones that double every 10 years, he adds.
Meanwhile, Conservative MP Peter Bottomley, joint-chairman of the all-party parliamentary group on leasehold reform, this week challenged Peter Redfern, chief executive of Taylor Wimpey, to explain his company’s policy. “Is there any reason to sell a new house leasehold except to put the new owner at a disadvantage? This may have been legal; it is clearly undesirable. A respectable company, I believe, should rule out this arrangement as corporate irresponsibility.”
In a statement, Taylor Wimpey indicated that it is prepared to look again at its ground rent clauses. It said: “We reviewed the mechanism for ground rent increases in 2011 and decided that the RPI was a more appropriate measure going forward. All Taylor Wimpey homes on developments commenced after 2011 have been sold with ground rent increases linked to the RPI. All purchasers have independent legal advice.
“Until recently, we hadn’t been aware of the concern of some customers and homeowners regarding these pre-RPI clauses and the difficulties that they are currently experiencing in selling or mortgaging their homes. Having heard the cases described and in order to establish the facts, we are undertaking a review.”
• The solicitors featured above are offering a free evaluation for leaseholders seeking to claim professional negligence. At Carter Lemon Camerons contact [email protected] or 020 7406 1040. At Dowse & Co contact [email protected] or 020 7254 6205.
A country-wide problem
Nearly £2bn-worth of new-build leasehold houses were sold in England and Wales last year, according to a detailed analysis of Land Registry data.
Builders traditionally sold houses as freehold, but they’ve switched to leasehold on some estates, saddling buyers with spiralling ground rents. In some cases highlighted by Money, buyers later say their homes are unsaleable.
Research by the Leasehold Knowledge Partnership reveals there were £1.9bn of new-build leasehold homes sold in 2015. So far this year the total is £775m. “As the Land Registry can take several months to record a new transaction, the 2016 data is incomplete. It should not be assumed the 2016 figure will be lower than 2015,” says Sebastian O’Kelly of LKP.
Clauses in the lease allow the freeholder to double the ground rent every decade, with it rising to £9,000 or more in some cases. Leaseholders wanting to buy the freehold find the builder has sold it on to another firm, which then seeks huge sums even though the lease may only be a few years into a 999-year term.
“The new-build leasehold houses stretch right across the country, from Penrith down to the Isle of Wight,” says O’Kelly. “Several areas of Wales are affected, with a reintroduction of leasehold houses on a scale not seen since mine owners began building tied accommodation in the Valleys. A disproportionate amount seems to be in the north-west and in poorer areas.” However, there are also smatterings of new leasehold house sales in the south-east and south-west, with heavy concentrations in Thurrock and Peterborough. So far, the most expensive new-build leasehold house sold this year was in Hammersmith for £3.3m.