In the know

Over the course of the last year, leasehold property has had a bad press. Complaints from owners of leasehold properties where the rent has doubled every 10 years, to the point at which the flats have become unsaleable, have generated political interest.

How far do the conveyancer’s obligations to the client go?

There is, however, nothing inherently wrong with the ownership of leasehold property, provided that the terms of the lease are fair and clearly understood by both parties. When I first started in practice, the typical lease ran for a term of 99 years, with a ground rent of £25 which doubled every 33 years. Registration fees for notices of assignment or mortgage were nominal, and the value of the freehold reversion was minimal for most of the term of the lease.

So what’s gone wrong, and why? And what role might the conveyancer take in helping clients to better understand the potential lease issues in the properties they want to buy?

What’s gone wrong with leasehold?

It’s only in recent times that things have changed. Some developers have taken the opportunity to have a ‘second bite of the cherry’ by imposing a significant ground rent which then increases on a much more regular basis (every 10 years now seems to be the norm). The rate of increase has also become substantial, with the rent either doubling or increasing in line with the retail price index (RPI), which in some areas could considerably outstrip the value of the property itself.

The value of the freehold reversion has risen accordingly, enabling developers to sell the reversion for a substantial sum, based on not only the potential rental income, but also the income to be made from giving consent to the various matters which are restricted in the lease.

As a result, some sellers seeking to sell a leasehold property where they have failed to obtain the appropriate consent find themselves effectively being held to ransom by their landlord demanding a large consideration for the consent to be given retrospectively. Anxious to sell the property, they pay, rather than seeking to challenge the lawfulness of the sum demanded.

Some managing agents also take advantage of their role in the leasehold sale process, by charging significant fees for providing information which is often quickly and easily regurgitated from a computer, as well as seeking registration fees well in excess of the cost of performing the task.

Against this backdrop, the government consulted last year on the homebuying and selling process and announced plans to ban leaseholds for almost all new build houses and require ground rents on new long leases to be set to zero . Meanwhile, the Law Commission has launched a project on commonhold.

There are calls from some for leasehold to be abolished. An updated version of commonhold could be introduced, but that would not solve the problems of existing leasehold property. The cost of conversion (the ‘enfranchise to commonhold’) would be significant, quite apart from the claims of those who currently own the freehold reversion, and the timescale involved would be lengthy.

The information gap

In March, the Solicitors Regulation Authority (SRA) published a report presenting the findings of independent research involving 1,501 people who had bought or sold a property during the previous two years. Seventy-six per cent of legal service users said they were satisfied with the service they received from their conveyancing solicitor.

Doing nothing is clearly not an option, but deciding how far you go beyond that is something which every conveyancing firm will need to consider individually.

There were, however, several areas where improvements could be made. One of the most important of these related to leasehold: specifically, information about the lease. According to the report, 20 per cent of people who bought a leasehold property ‘did not remember being provided with any information on the length of lease, service charges and other payments such as ground rent’. Against the headlines of the last year, that figure is clearly a matter of great concern. Perhaps, however, the key words are ‘do not remember’. I have lost count of the number of occasions on which I have sent a contract to a client to sign for the purchase of a property, together with a detailed report highlighting key issues, and the entire bundle of paperwork has been returned to me with the signed contract, with very little indication that the report has been read or even looked at.

There are some clients who take great interest in the small print, insisting on seeing the standard conditions of sale which are automatically incorporated into the document which they sign, and scrutinising all of the documentation. The vast majority of clients, however, simply want to know how quickly they can obtain the keys to the new property. They are really not interested in problems.

The role of estate agents

One of the big problems in terms of information flow is that estate agents are not giving information about the lease to buyers, notwithstanding the obligation on estate agents to make such information available. In consequence, buyers find the property of their dreams in blissful ignorance of any issues with the lease, and it then falls to their solicitor to shatter their dreams.

The announcement from the government in April that it intends to ‘professionalise the estate agent market, driving up standards and bringing an end to “rogue managing agents”’ is welcome, particularly the changes ‘requiring managing agents and freeholders to provide up-to-date lease information for a set fee and to an agreed timetable which will end the current situation where leaseholders are at the mercy of freeholders and their agents’, and ‘strengthening the National Trading Standards Estate Agency Team [NTSEAT] so they can carry out more enforcement activity which includes banning agents’.

One of the present problems is that the NTSEAT is insufficiently resourced to enforce the existing consumer protection regulations. If the government is serious about improving the lot of prospective homebuyers, it will have to find the necessary funds to ensure that whatever new regulations are introduced, they are enforced with persuasive sanctions for non-compliance.

The role of the government

At the same time as it announced the changes to estate agency controls, the government announced the creation of new guides on ‘How to Buy’ and ‘How to Sell’, designed ‘to ensure customers are better informed of the process and know what questions they should be asking’. The government already provides information on how to extend your lease, buy the freehold or take over the management of the building, as well as providing a lot more useful and well-explained information.

Too much information?

The problem remains, however, that when people are buying a property, they are swamped with information – not only from their conveyancer, but also from their lender. The availability of data is such that people find themselves buried in information, much of which they probably don’t want, but which professionals now feel obliged to provide in order to avoid subsequent claims for not having provided it.

The role of the conveyancer

Against this background, and until and if commonhold takes over from leasehold for the vast majority of existing leasehold properties, there seems little immediate alternative other than for conveyancers to provide the essential information a leasehold buyer needs, in a comprehensible form, and to ensure (so far as reasonably possible) that they read it, or at least acknowledge that they have received it.

That begs the question of what is the ‘essential information’ in question. Clearly, the length of the lease remaining, the amount of the ground rent, the provisions for review (both the review period and the method to be followed in reviewing the rent), and the current level of service charge payable are the basics which many buyers over the last couple of years are now denying that they received (according to not only the SRA review, but also groups such as the National Leasehold Campaign).

But is the provision of just that information sufficient? Simply being told that the lease which you are purchasing has 81 years left to run is surely not enough. It would be unreasonable to think that what we used to call the ‘man on the Clapham omnibus’ would understand the significance of that particular number and the fact that he needs to persuade his seller to set in motion the steps to extend the lease and to assign the benefit of having done so to him, because if he waits until he has bought the property, he will not be able to take those steps himself without the cost having risen significantly because of the effect of the ‘marriage value’.

There is … nothing inherently wrong with the ownership of leasehold property, provided that the terms of the lease are fair and clearly understood by both parties.

Perhaps telling the client that the ground rent will double every 10 years should be sufficient, in that the mathematics involved are fairly straightforward. But will the client also realise that the higher the ground rent and the shorter the lease, the more it will cost at some time in the future to exercise the right to extend the lease? Again, it is fairly obvious that if the ground rent starts at a nominal £5 and doubles every 10 years, it is unlikely to become a problem. If, however, it starts at £500, it rapidly assumes a significant challenge to selling the property – but one which is perhaps lesser if the initial purchase price of the property was £5m rather than £100,000. How far do the conveyancer’s obligations to the client go?

Other questions still remain. To what extent should a conveyancer be obliged to explain the provisions of the relevant parts of the Leasehold Reform, Housing and Urban Development Act 1993 to someone buying a leasehold property, and how do you do so in terms that they will understand, and without swamping the client with information which they may well not want to know? Certainly, I would suggest that you need to explain the position with regard to lease extensions, but should you also explain the right to manage or collectively to acquire the freehold?

Doing nothing is clearly not an option, but deciding how far you go beyond that is something which every conveyancing firm will need to consider individually. Perhaps a standard ‘health warning’ with links or references to information available elsewhere may be sufficient. Advising clients to read the government website referred to above would be a good starting point.

Having decided how far you go, you may also wish to consider how much you charge for leasehold purchase transactions. Most firms charge a premium for leasehold work, but the risk of those types of instructions and the amount of work you need to do has perhaps increased considerably in recent years. Insurers will be aware of the claims made by members of the leasehold campaign and those interviewed on behalf of the SRA. Expect additional questions from your insurer when you come to renew your professional indemnity insurance!