PPA Commentary: Why are rents payable for leasehold property becoming more of a ground for concern?

Leasehold property is a hot topic in the current legal press with both commentators and indemnity insurers alert to the potential rise in claims against solicitors relating to long leasehold transactions.

The Government issued a consultation in the summer of 2017, which produced over 6,000 replies and, following consideration of these, has produced proposals to crackdown on unfair and abusive practices in the leasehold system. One of the biggest focus areas is ground rents.

Traditionally, ground rents were nominal sums (£50 per annum). However, more recently, landlords are endeavouring to grant leases, or lease extensions, with ‘modern’ ground rents of £200 doubling every 10 years. After 60 years, the ground rent will be £12,800 and at the end of the term, on a new 125 year lease, it will be £819,200 per annum. It is easy to see how this would have a significant effect on the value of the property!

Developers have seen an opportunity to make ‘easy money’ and have been selling houses on a leasehold basis. The latest estimate is there are around 1.4 million leasehold houses and so this issue has the potential to affect the whole property market, not just flats. National developers, Taylor Wimpey, have been on the receiving end of some very negative publicity for imposing escalating ground rent clauses in leases of its new homes, but it is not the only developer to take advantage of the current lack of legislation in this area and surreptitiously generate a rather healthy income for itself. Indemnity insurers are predicting a spate of claims relating to improper advice on rising ground rents.

It is not just the buyer that solicitors need to consider, there is also the lender. A lender may have a complaint if it was not advised of any onerous ground rent provisions in a lease. The UK Finance Lenders Handbook (previously the CML Handbook) requires solicitors to report “any increase in the ground rent [that] may materially affect the value of the property” (para 5.14.9). There is also the consideration of ‘Good and Marketable title’ under para 5.6.1. Both Nationwide and Yorkshire Building Society have changed their CML requirements in relation to acceptable ground rents meaning buyers are finding it harder to get finance.

Another fast emerging risk is the possibility for the provisions of the Housing Act 1988 to bite. This Act came into force in January 1989 but the problem has only recently been recognised. The issue surrounds leases where the ground rent is, or will during the lease, be £250 or more (£1,000 or more in London). The lease then falls within the provisions of the HA 1988 and becomes an AST. The problem is centred on Ground 8 of Part I of the Second Schedule which provides that where x rental payments are missed in a given period the Landlord may apply to the Court and the Court must, without discretion, terminate the lease and award possession of the property to the Landlord (i.e. the freeholder). The power to grant relief does not apply to ASTs. Historically, the vast majority of leases have fallen outside of these provisions but with the rise of ‘modern’ ground rents then this issue now affects hundred and thousands of leases.

Another issue is leasehold enfranchisement. Flat owners who wish to extend their lease under the statutory provisions contained in the LRHUDA 1993 and reduce their ground rent to a peppercorn will find that any onerous ground rent is likely to scupper any extension claim. Under Schedule 13 of the 1993 Act the landlord is entitled to be paid a sum for the reduction in the value of the landlord’s interest. Put simply, this is a payment to reflect the loss of income from the ground rent for the original term. With a ‘modern’ ground rent of £200 doubling every 10 years the value of this is likely to be so high as to be prohibitive to the flat owner, meaning that they cannot afford to extend their lease at all. By the same token, collective enfranchisement claims may be scuppered if one or more leaseholder(s) in the block has onerous ground rent review provisions in their lease. Unscrupulous landlords have long tried to tempt flat owners to accept onerous ground rents by offering a relatively cheap up-front premium and sadly, those who have been poorly advised, are now realising that any potential saving was, in fact, a false economy.

Leasehold property is a minefield. Practitioners need to be alert to the risks and address these when advising clients. Any legislation enacted to regulate the leasehold market is unlikely to be retrospective and so the problem doesn’t appear to be one that will disappear any time soon.