New ground rent reforms will reduce claims against conveyancers

On 7 January 2021, the Housing Secretary Rt Hon Robert Jenrick MP announced extensive reforms to allow leaseholders to extend their leases by 990 years and reduce ground rents to nil. The move  follows the government’s previous commitment to restricting ground rents to zero for new leases as a result of the  recommendations made by in Law Commission’s consultation on the current leasehold regime in July 2020. The new legislation, which will be brought forward in the upcoming session of Parliament, forms the first part of the package of reforms proposed by the Law Commission last year.

Current position

As we explained in our previous article, “Escalating Ground Rent” published in March 2020 here the practice of selling new build houses on a leasehold (rather than the more traditional freehold) basis – and then retaining the right as landlord to charge onerous fees as ground rent or service charges – has been used extensively over recent years by residential housebuilders as a generative additional income stream. The current regime only allows leaseholders to extend their lease, often at substantial cost, by 50 years (in the case of a house) and 90 years (in the case of a flat). It is also marked by the existence of escalating ground rent provisions in leases – in extreme cases, allowing payable ground rents to double every 5 or 10 years. This much-criticised sideline has often resulted in purchasing homeowners becoming trapped, as the lease provisions are sometimes so onerous that their properties effectively become unsellable.

Changes proposed

A number of changes will be introduced:

• Leaseholders will have the right to extend their leases by a maximum term of 990 years.
• There will no longer be any requirement to pay any ground rent to the freeholder.
• There will be a cap on ground rent payable when a leaseholder extends a lease or becomes a freeholder.
• Onerous charges, such as ‘marriage values’, which come into force in leases with less than 80 years left, will be abolished.
• The government’s commitment to restrict ground rents to zero for new leases will now extend to retirement leasehold properties – a move to protect the elderly from uncertain and rip-off practices.
• A Commonhold Council – a partnership of leasehold groups, industry and government – is to be established to prepare homeowners and the market for the widespread take-up of commonhold.

The reforms will be welcomed by both leaseholders and conveyancing solicitors alike, whose bargaining position in any lease extension process will undoubtedly be strengthened going forward.

Impact on claims

In recent years, conveyancers have faced criticism – and professional negligence claims – for failing to identify escalating ground rent provisions in leases and/or inadequately advising prospective buyers on the implications of such provisions. These claims are challenging to defend and conveyancers often find themselves liable for the leaseholders’ costs of extending their leases. These costs are often difficult to calculate and can fluctuate greatly. In worst case scenarios, conveyancers can find themselves liable for the value of the lease which has been rendered unsellable or the reduction in its value.

However, the announced reforms could make it easier to defend existing leaseholders’ claims against conveyancers. it could be argued that leaseholder claimants should await implementation of the impending reforms – which will allow them to extend their leases for a longer period of time and at a lower cost – rather than incur significant costs now so as to extend  leases for a maximum of 90 years (50 years for houses).

Once implemented, the reforms will also undoubtedly impact any future claims. Whilst conveyancers may remain liable for leaseholders’ costs of extending their leases, those costs are likely to be lower and more transparent. They should no longer rely solely on surveyors’ valuations and landlords’ arbitrary costs. This could result in lower settlements further down the line – possibly within the policyholder’s   excess.

Comment

Legal professionals and their professional indemnity insurers alike will welcome the announced reforms, which should impact positively on exposure to both existing and future claims. We are interested to see the medium/longer term impact on claims and, also, what additional reforms are introduced on the back of the Law Commission’s proposals. We will provide a further update in due course.