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Ground Rent Litigation

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Ground Rent Litigation Ground Rent Litigation Ground rents, and probably indeed the entire system of long-leaseholds, can be seen as an anachronism. Purchasers of long-leasehold interests in property may regard themselves as the “owners” of the property. However, many thousands have discovered that they are subject to covenants in favour of freeholders. This situation is pretty much unique to England and Wales. Scotland, the USA and Canada, for instance, have done away with the long-leasehold system. It may be that England and Wales is going the same way, with recent government announcements to crack down on unfair practices by freeholders, and probably, a total ban on new-build leasehold houses. A particular practice, which has been highlighted by the mainstream press, is that of doubling ground rents, whereby long leases contain clauses requiring the payment of ground rent that doubles periodically. This obviously has a major impact on the value of the leasehold (and indeed freehold) interest. When the true position is found out as to increasing ground rent liabilities, it is very likely that the long-leasehold owners will want to make claims. The problems are often remediable, via leasehold enfranchaisement and acquisition of a share of freehold, or an extension of the long lease’s term with reduction of ground rent to a peppercorn. However, the remedies come at a cost of professional fees, the monies payable to the freeholder, and also the time and hassle of going through the necessary legal processes, and if appropriate garnering the support of sufficient numbers of fellow long-leaseholders. First in the firing line for claims are conveyancers. The Council of Mortgage Lenders (CML) Handbook requires conveyancers to check any specific conditions relating to ground rent in a lease. Paragraph 5.14.9 in particular states: “We have no objection to a lease which contains provision for a periodic increase of the ground rent provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable. If you consider any increase in the ground rent may materially affect the value of the property, you must report this to us.” Thousands of ground rent clauses however may be regarded as unreasonable. Plus, the threshold for reporting is extremely low. Indeed the last sentence of paragraph 5.14.9 does not make much sense. Almost any increase in ground rent, unless at a nominal de minimis level, will materially affect the value of the property. Some lenders (e.g. Yorkshire BS) have also made specific extra requirements in respect of ground rents. Conveyancers also of course will be liable unless they have given sufficient advice to the purchaser clients and many may not have given any advice on ground rent clauses. The relevant leases also often have other clauses which may be considered unreasonable and in respect of which inadequate advice may have been given, for example, fees for remortgaging or making structural changes. Furthermore, there are potential claims that are more complex as to the adequacy of advice in respect of leaseholds with short terms that will need to be extended, often at high cost. Conveyancers may also be liable for breach of fiduciary duty if a conflict of interest existed, most usually if they had a commercial relationship with then vendor of new-build leasehold properties. Valuers may find themselves in the cross-hairs, although many will not have been properly instructed as to the tenants’ covenants and therefore will escape liability. Obtaining careful and considered expert evidence is of course necessary to make a claim for diminution in value. The expert should consider the availability of mortgages for the next purchase of the property and how that affects value. If leasehold enfranchaisement is available it may well be more straightforward to claim the cost of cure and consequential losses. These cases often throw up limitation problems, as many of the leases were made more than 6 years ago. Indeed limitation may be the most fruitful defence for conveyancers. Claimants in many cases will struggle to make out s14A Limitation Act 1980 arguments, deliberate concealment, or other attempts to extend the 6 year period. Historically, residential conveyancing has generated the largest number of claims on solicitors’ professional indemnity policies. That number is likely to swell as claims arising from leasehold issues come to light. JOSHUA MUNRO Joshua Munro has acted in professional negligence claims for over 14 years and is happy to give informal initial telephone advice to solicitors in this area. .
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