Rip-off leaseholds: the problem of onerous ground rents

Esther Millard, and Sara Abou-Jaoude and from Barlow Robbins solicitors, discuss the proposals contained in the Government’s consultation paper, “Tackling Unfair Practices in the Leasehold Market”. Sara is a residential property solicitor and Esther specialises in professional negligence claims against solicitors.

Esther: The consultation paper covers a range of leasehold-related issues. But the issue about which there has been particular public concern, and which we are going to discuss today, is onerous ground rents. These are ground rents that start off quite modest – say £250 per year – but which double after a certain amount time, and then double again, and again, until they reach a point where the property is unsellable. The Government is proposing to limit the ground rent payable under all new leases – with just a few exceptions – to a ‘peppercorn’ (which is effectively zero) for the whole term of the lease. 

At what point do ground rents become ‘onerous’?

Esther: Sara, at what point do ground rent provisions become ‘onerous’? What sort of ground rent provisions are ‘reasonable’ and what provisions would you normally expect to see in a new-build lease?

Sara: It is actually quite normal to see ground rents double every 25 or 50 years, until the end of the term of the lease. Leases from the 1980s and earlier tended to state a fixed amount for ground rent, but from the 1990s onwards it became much more common to double the ground rent every x number of years. As a mechanism, I don’t believe that it is onerous per se. 

Esther: So I suppose the question is: how frequently would ground rent have to double, to make it onerous? There have been reports in the media of ground rents doubling as often as every 10 years, which would lead to an astonishingly large figure after 100 years:

Increase every 10 years
Initial ground rent£250
Annual ground rent after 10 years£500
Annual ground rent after 20 years£1,000
Annual ground rent after 30 years£2,000
Annual ground rent after 40 years£4,000
Annual ground rent after 50 years£8,000
Annual ground rent after 60 years£16,000
Annual ground rent after 70 years£32,000
Annual ground rent after 80 years£64,000
Annual ground rent after 90 years£128,000
Annual ground rent after 100 years£256,000

Esther: Of course, it would be highly unusual for the same owner to own their property for 100 years, but that’s not the point, because when the leasehold owner comes to sell their property, they will be selling it subject to the lease already in place. So it’s easy to imagine how a leasehold property burdened with this type of ground rent could become unsellable, and the annual ground rent payments unmanageable.

What advice about ground rent should property solicitors give to their clients?

Esther: Sara, have you ever acted for a purchaser where you’ve looked at the lease and thought, “That ground rent will increase too rapidly and too markedly, and that’s unacceptable”?

Sara: Well, not really. It is not the job of property solicitors to advise our clients on whether the amount of ground rent set out in the lease is ‘fair’ as such. However, when providing the client with the report on title, prior to the exchange of contracts, I do carry out a rough calculation of how much the ground rent would amount to in ten, twenty, fifty years’ time etc, along the lines of the table shown above. We won’t really comment on whether the value (be that the purchase price or the ground rent) is ‘fair’ or not – that’s outside of our area of expertise, not being valuers – but we will check the ground rent provisions in the lease, explain them to client, and make sure that the client is aware of the long-term implications of those ground rent provisions, to include affordability and future marketability.

Another potentially onerous ground rent clause is when the ground rent may start off as a modest amount, but then be recalculated on the basis of a ‘rent review date’ using a complicated formula where the basis of the calculation is the market value of the property. Fortunately, those types of leases are few and far between, but I have come across them. The difficulties from the purchaser’s point of view are that (a) there is no certainty about what the ground rent is going to be in the future, and (b) the likelihood is that the ground rent will increase significantly as property prices rise. If I were acting for a purchaser, I would certainly bring such a clause to their attention, so that they could make an informed decision about whether or not they want to buy a property which is burdened with that sort of obligation.

Also, we may need to report onerous ground rent clauses to the mortgage lender prior to exchange, as it could affect the saleability of the property, and impact upon the borrower’s ability to meet rent and mortgage repayments. Even if the purchaser is a cash buyer without a mortgage, I would still bear the standard lender requirements in mind; what is acceptable to a cash purchaser might not be acceptable to a future purchaser who also needs to fulfil their mortgage lender’s requirements. It is a property solicitor’s duty to highlight to the purchaser what pitfalls their lease clauses might create in the future, when they come to sell.

Can the purchaser of a new build pull out of the purchase of a property with onerous ground rent?

Esther: Sara, if your client were to look at the ground rent information that you had given them and think, “Hold on a minute, that ground rent is going to get disproportionate over the years!” can they pull out of the purchase at that stage?

Sara: Yes. Typically a buyer of a new-build property will have signed a “reservation agreement” at an earlier stage. This sets out the basic heads of terms for the transaction, secures the property for a specified period and requires the purchaser to pay a reservation fee of around £1000 to £2000 to the developer. But signing a reservation agreement does not bind the purchaser to going ahead with the purchase. Up until the exchange of contracts for sale there is still an “out” for the buyer if they are unhappy with the ground rent provision – but they will usually lose the reservation fee and also any costs incurred to date, such as the mortgage application fee and the cost of the survey.

Esther: Is there ever any scope for negotiating changes to ground rent terms in a new-build lease, prior to exchange of contracts? 

Sara: No, there is little room for negotiation of the terms, because all leases within a development have to be in the same form. So if you have a development on which some of the properties have already exchanged and completed, further purchasers are going to be stuck with leases which mirror the existing ones. It’s not the job of a purchaser’s solicitor to try and re-negotiate the ground rent etc. and no large-scale developer is likely to entertain that conversation. That said, if the general consensus amongst the buyers’ solicitors is that the ground rent provisions are too onerous and/or not lender-compliant, the developer would be best advised to reconsider their position.

What are the options if someone has already purchased a leasehold property with onerous ground rent provisions?

If the leaseholder can obtain the freeholder’s consent to vary the ground rent, then this can be done by deed. But as the law currently stands, there is no mechanism for forcing the freeholder to vary the terms relating to ground rent, no matter how unreasonable they are. The situation is different in relation to service charges; under the landlord and tenant legislation there is scope to challenge the apportionment of service charges, and the reasonableness of service charges, but ground rents, never.

The Government has not put forward any proposals that would relate to onerous ground rent provisions in existing leases, but the consultation paper does ask for suggestions on how these might be tackled. So it may be that the law in this area will change.

The other possibility is to seek to purchase the freehold. If the freeholder will not consent to this, it may be possible to compel them to sell it to you.

Esther: Where it is not possible to purchase the freehold or vary the lease, there are other options. If a leasehold owner was not provided with proper information about the ground rent clause before they exchanged contracts on the property, then it is possible that they will have a professional negligence claim against their conveyancing solicitor. 

The first step for anyone in this situation is to find the information that they were provided with by their solicitor when they purchased their leasehold property. In particular, they should look through the report on title? If it gives information about ground rent which is along the lines of what Sara has told us, then the solicitor will probably have discharged their duty. But if it does not advise them of the ground rent obligations, then the solicitor may have been negligent.

If the purchaser simply did not read the report on title properly, that is not really the fault of the solicitor. Having said that, Sara, if the ground rent provisions were as onerous as the ten-year doubling up example set out above, do you think that the solicitor is under a duty to take extra care to flag it up? Perhaps by mentioning it on the telephone as well, or drawing particular attention to that part of the report on title in the covering email?

Sara: Well, not only will the ground rent provisions be explained in our report on title, but also when we send them the contract for sale (which will have the lease document annexed to it), we ask the client either to expressly confirm (by signing an authorisation form) that they have read and understood the report, or else raise with us any further points or concerns that they would like to discuss. So we always bring ground rent provisions to our clients’ attention, and make sure that they have ample opportunity to raise any concerns.

I would stress again though that although we highlight such provisions to the client, explain the calculation and the consequences in terms of saleability, and report the clause to the lender if appropriate, it’s really not our job to check the long-term affordability with the client.

Esther: I understand that: you have to be able to draw the line, and questions about affordability and valuation fall outside the scope of what a property solicitor is instructed to do. I think we’re coming at this question from different standpoints, because I’m imagining how I would put together a professional negligence claim against a solicitor, and you are imagining yourself in the shoes of a solicitor who is being sued! Is that fair?

Sara: Yes, probably! But I think we can both agree that it is the duty of a property solicitor to advise their client on the provisions in the lease that relate to ground rent.

Esther: And can we go further and say that the more onerous or unusual those provisions are, the greater the duty on the solicitor to bring them to the client’s attention…?

Sara: Agreed; buyers need to understand the implications, even if they are not directly affected during their own period of ownership.

Esther: So if someone believes their ground rent provisions are onerous, they should look back at what was contained in the report on title. If they cannot find the report on title, then they should contact their conveyancing solicitor and ask for a copy. Solicitors generally keep their files for at least six years, so if the purchase was more than six years ago, obtaining the document may be tricky, but you should still ask, as electronic copies may be retained for longer.

Having checked your report on title, if you still feel that you were not properly advised, then you can contact a solicitor specialising in professional negligence claims. If they can establish that you were negligently advised, and that as a result you have suffered a loss, then they can demand that your conveyancing solicitors compensate you for that loss.

Bringing a professional negligence claim is not a quick process, and there is an associated cost. But unlike some other types of claims, settlements are frequently negotiated without having to issue court proceedings, and the majority of costs that the claimant incurs can be claimed back from negligent solicitors.

Another option is to make a complaint directly to the solicitors that advised you, and if that does not resolve things, complain to the Legal Ombudsman about the standard of service that you received. The Legal Ombudsman does not actually investigate or make decisions on whether or not solicitors have acted negligently, but inevitably, there is often a cross-over: poor service can also amount to negligence, and negligence will often constitute poor service. The Legal Ombudsman has the power to award compensation of up to £50,000, although it is actually much more common for awards of £500-£1000 to be made. The main advantage of going down the Legal Ombudsman route is that, if you do it yourself (rather than with the assistance of a solicitor), then it is free. But there are disadvantages too. One is that the Legal Ombudsman will not ‘quantify your losses’ as such (which is what would happen in a professional negligence claim), so the amount of compensation that you are offered may seem quite minimal. If you decide to accept that compensation award, then you will no longer be able to bring a professional negligence claim against the solicitor based on the same facts.

A further possible option is to consider whether you were mis-sold the property by the developer. What did they tell you about the ground rent? Did they make representations that turned out to be untrue?

Whether you are considering investigating a mis-selling claim, or a professional negligence claim or complaining to the Legal Ombudsman, there are strict time limits that need to be complied with. This isn’t the place to discuss those in detail, but it is something that needs to be borne in mind.

In addition, The Solicitors Regulation Authority (‘SRA’) has invited anyone who believes that they were not properly advised on their leasehold purchase to report the matter to the SRA. To be honest though, it is not clear to me how making a report would actually help the leaseholder. The SRA investigates misconduct issues, so unless the solicitor has acted in a way that breaches the SRA’s Code of Conduct (for example, acting when there is a conflict of interest), then the complaint will not fall under the remit of the SRA. Even if there has been a breach of the Code of Conduct, the SRA does not actually have the power to award compensation. So whilst your complaint could even up in disciplinary measures being taken against the solicitor, it will not actually provide the leaseholder with any redress. Also, if the SRA’s investigations lead to a discovery of dishonesty on the part of the solicitor, then this can in itself lead to problems with the solicitor’s professional indemnity insurance. This means that, if the leaseholder later tries to bring a professional negligence claim against the solicitor, they may find that the solicitor’s insurer is not obliged to pay out.

There are a variety of options, and different ones will be appropriate in different circumstances. A property litigator like Lauren can advise on how the situation might be able to be rectified, and if this isn’t possible, a professional negligence lawyer like me can advise on how best to get compensation for the unfortunate mess that you are left with.

Should leaseholders continue to pay onerous ground rent?

Esther: Lauren, should leaseholders continue to pay the ground rent that falls due each year, if they feel that it is unfair? What happens if they don’t pay the ground rent?

If there is a forfeiture clause in the lease, then non-payment of rent can entitle the freeholder to take proceedings to forfeit the lease. And by ‘rent’, I mean anything that is reserved in the lease as ‘rent’. This is not necessarily just the ground rent; for example, insurance contributions or service charge charges could be reserved as rent. Non-payment of any of those things could trigger the lease’s forfeiture clause.

Thanks to the Protection From Eviction Act 1977 and the Commonhold and Leasehold Reform Act 2002, the freeholder can’t just walk into your home and change the locks; a lengthy court process has to be gone through, which gives a layer of protection to home owners. Also, if the property is mortgaged, the lender will usually intervene and make the payment (and then claim it back from the leaseholder), because it obviously won’t want its security to be compromised. But if there is no lender, or if for some reason the lender doesn’t pay the ground rent arrears, the end result is the leaseholder could end up having to give the lease back to the freeholder.

Esther: Would the leaseholder get compensation?

No. There are ways of defending a forfeiture claim by remedying the breach and paying all costs, but if that doesn’t happen, once the lease is forfeit, it’s forfeit.

Esther: Yikes!

It is draconian. In all the time I’ve been doing property litigation I’ve never seen a lease actually handed back, but that doesn’t mean it couldn’t happen, and it is a very effective threat. So if there is one thing that you pay under your lease, make sure it is the ground rent – and any other payments reserved as ‘rent’ – to avoid the risk of forfeiture. But pay under protest, and always specify exactly what the payment is for.

In a nutshell

If you are purchasing a leasehold property:

Esther:  So, to sum up If you are purchasing a leasehold property: 

  • Read the report on title that your solicitor prepares for you, note what it says about ground rent, and if you are not sure what it means, ask your solicitor to explain.
  • Think about whether the ground rent is affordable for the whole term of the lease.

If you currently own a leasehold property with onerous leasehold provisions:

  • Consider approaching the freeholder to discuss purchasing the freehold.
  • If the freeholder refuses, seek legal advice on whether you may be able to compel the freeholder to sell.
  • Check your report on title to see whether your solicitor advised you on the ground rent when you bought, and if not, seek legal advice on the possibility of a professional negligence claim.
  • In the meantime, make sure you pay anything reserved in the lease as ‘rent’, but do it under protest.

For further advice on the above topics, please contact us.