Is your law firm exposed to potential leasehold claims?

The client was understandably aggrieved to discover that the ground rent of her one-bedroom flat doubles every five years (which would take it from £525 in 2016 to £1,050 this year, increasing to £4,200 in 2031 and to more than £1m in 50 years’ time), and is pursuing their negligence claim on the basis that the firm failed to tell her about the clause. 

Whilst the question of whether there was any negligence on the firm’s part is still to be established, conveyancers who routinely act in property purchases may be surprised by the allegation given that it is common practice to inform the client of such information in the contract report which tends to be sent out in the early stages of the transaction.

There is however arguably more to it with the key consideration being whether the conveyancer has done enough and gone far enough in their duty to act in the client’s best interests.

To take the example of the contract report - is informing the client of such crucial information within the depths of a lengthy report (which the client may not even read thoroughly) doing enough to discharge this duty?

In this scenario, the responsibility lies with the conveyancer to ensure that the client firstly understands the difference between freehold and leasehold ownership and secondly understands the long-term financial implications of the contractual obligations and fees involved. It would be difficult to confidently affirm that both elements had been achieved without double-checking the client’s understanding with them directly, yet how many firms are actually going to these lengths in practice?   

These issues were highlighted in the SRA’s residential conveyancing thematic review, published in April 2019, when the SRA warned that they would take robust action if they found evidence of clients not being made aware of onerous clauses in their leasehold contracts, such as the regular doubling of ground rents.

Although the SRA has been quiet on this issue of late, considerable change is afoot in the wider public arena with leasehold reform legislation, which seeks to rectify the various cracks in the system and is being lauded as the biggest shake up of property law in 40 years, expected imminently.

Reforms are to include giving leaseholders a universal right to extend their lease by 990 years at zero ground rent, a ban on the sale of leasehold houses and the move towards commonhold as an alternative to leasehold ownership.

The reforms could mean big savings for some leaseholders, yet it remains unclear if, how, and when zero ground rents may be applied retrospectively, a crucial factor to the millions of homeowners currently locked in by onerous ground rent clauses in their leases. It is very much a case of watch this space to see how the reforms take shape.

Also underway is enforcement action being taken against several housing developers by the Competition and Markets Authority (CMA) for possibly using unfair contract terms and mis-selling leasehold homes. The CMA are said to have been in contact with the SRA about the role that conveyancers play in the leasehold sector, but their focus is very much on developers.

That is not to say that conveyancers and law firms are off the hook as the leasehold issue continues to play out and caution should still be taken by those practising in this area.

Some practical steps to take in the meantime, should you have concerns about your firm’s handling of leasehold purchases, are set out below:

1. Liaise with the firm’s PII insurer as to the firm’s likely exposure to negligence claims and steps to take to mitigate against this.
   
   
2. In collaboration with the PII insurer, decide on a proactive strategy going forward. This may include liaising with the developer, seeking their agreement to amend any onerous clauses in the lease and contacting clients to see if they need help in getting their lease amended – this could help to ward off complaints in the future; but be careful not to do anything that could be seen as acting in a self-interest conflict position.
   
   
3. Review the current approach to advising clients on what they are buying, what this means to them practically and financially and how this may impact on future saleability – this should include reviewing the wording in precedent documents. Consider if you are going far enough to establish that the client fully understands the full implications and what aspects you can improve upon. This may include preparing key facts documents, getting to know your clients better and having conversations to check their understanding of key information and preparing a protocol as to how clients are to be advised going forwards, which highlights areas such as vulnerable clients to take extra caution with.