Ground Rents: Grounds for Professional Negligence
There has been a considerable amount of recent press coverage regarding the sale of new-build leasehold properties following the launch of the government’s consultation paper, Tackling unfair practices in the leasehold market, on 25 July 2017.
The consultation is aimed primarily at the practice whereby developers have been selling new-build properties on a leasehold rather than a freehold basis where there is no obvious reason for so doing because, for example, there are no shared services or facilities. The part of the practice which is attracting criticism, relates to the ground rent: the initial rent is relatively low but the leasehold terms provide that the rent can double every five or ten years. This can result in a ground rent increasing from say £300 pa at the outset to £1,200 in 20 years, £4,800 after 40 years, and to an eye-watering £1,228,800 after 120 years. The beauty of this arrangement for developers is that they are able to sell on the underlying freehold to investors once the development is complete and the plots sold.
Already the owners of such properties are facing difficulties in selling on their properties, particularly as some mortgage companies are now refusing to finance their purchase. If a cash buyer is the only available option, then the property is likely to sell at a substantial discount. It can also result in the freehold being substantially more expensive if the leaseholder wishes to buy the freehold under the enfranchisement legislation.
While the government is looking to curtail the practice in respect of future sales by limiting the amount of the initial rent and limiting the amount of future increases, it does not appear to be proposing retrospective action regarding past sales.
Accordingly, the owners of such properties may look to their conveyancers or valuers for redress. The conveyancers may well be liable if they failed to give any or any sufficient advice in respect of the rent clauses. Certainly, The Council of Mortgage Lenders Handbook requires conveyancers to report any increase in the ground rent that may materially affect the value of the property (Para 5.14.9). The owners may need to act promptly if such claims are not to be defeated by limitation arguments, and they should not wait until they want to sell their property before looking into this issue.
This is not legal advice; it is intended to provide information of general interest about current legal issues.