Legal profession facing ‘PPI-style’ claims over new-build ground rents

An agent has warned of an impending scandal on how purchasers have been advised on buying homes where ground rents creep up.

Ken Hume, of agents James Alexander, said the issue should be red-flagged.

Warnings include situations where leasehold owners who have been wrongly advised may find their homes unsellable.

Louie Burns, managing direction of Leasehold Solutions, which advises on extended and buying out leases, says recent revelations that Taylor Wimpey included a ten-year doubling ground rents clause in contracts were the “tip of the iceberg.”

He said that 80% of new-build flats are sold with onerous ground rent schedules in the terms and conditions that aren’t highlighted by lawyers, and suggested there could be a PPI-style scandal over negligence claims.

Burns said: “What would qualify for professional negligence in these cases is the lack of written advice on the serious future financial implications of the terms of the lease in question, namely the onerous ground rent schedules; where this isn’t evident the solicitor may be held to account.

“The Taylor Wimpey case is just the tip of the iceberg; this issue is on a scale akin to the PPI scandal which has dogged the banking industry for nearly a decade.

“The cost implications can be huge for an errant solicitor or valuer but each case is different.”

He cited one recent example where home owners won their case by demonstrating the implications of the ground rent increases were not adequately explained, leading to a settlement which imposed an average of £17,000 in costs for each law firm involved.

Research by Leasehold Solutions suggests that around 80% of new-build flats are sold with onerous ground rent schedules included in the lease terms. More than 42,500 new-build leasehold properties were sold last year.

Taking the average costs from Leasehold Solutions’ recent example, the company has estimated that the cost to the legal profession from professional negligence claims could reach £578m for 2015 alone.

A number of Taylor Wimpey’s ex-customers are believed to be considering legal action against the conveyancing solicitors who acted on their behalf, as they feel conned by the lease terms and claim their properties are now unsellable.

The firm has since said it will review the situation and highlighted that this clause only applies to leases on properties purchased between 2007 and 2011.

Pete Redfern, chief executive of Taylor Wimpey, addressed the concerns in a letter to MPs on the All Party Parliamentary Group on leasehold reform, disclosed by the Leasehold Knowledge Partnership.

He said: “We cannot talk for other house builders, but from a Taylor Wimpey perspective the leases in question were introduced in 2007. At this point the average difference in capital value compared to an RPI lease was slightly less than 1% of the average sale value of the property. We reviewed this mechanism for ground rent increases in 2011 and decided that RPI was a more appropriate measure going forward.”

Legal action could have implications for agents trying to sell new-builds and will put more pressure on conveyancers to make sure all risks and costs are highlighted.

Ken Hume, of agents James Alexander, described the situation as scandalous.

He told EYE: “Solicitors and builders are culpable here.

“Some first-time buyers rely on their advisers, in particular their solicitor. These issues should be red-flagged.

“As for the developers, I think they are being entirely unfair and preying on the buyers, knowing that there is a lack of new-builds so they have no choice.

“This for me is an issue that should be legislated against.

“If the Government can legislate on tenant deposits, they should encompass these deals as unfair terms in contracts, but I guess large builders and the government public school boys are likely to be hand in glove so I suspect they will allow this to continue

“Any agent has an obligation to disclose material facts and they don’t get much bigger than this.

“However, agents not wanting to lose their very valuable client and disclosure to buyers makes them conflicted.

“This is where the backstop of the solicitor should come in. As they also act for the lender they could easily stop this by advising the lender that they may have difficulty in selling in the case of repossession.”

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3 Comments

  1. AgentV

    Very interesting article, but a worked through specific example, showing the rent escalation costs etc. would have added much more.

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  2. Tim Higham

    Are there really conveyancers who fail to state the current ground rent the client will pay, and then more importantly how it rises? Sadly, I can imagine there are.

    The trouble is, on new build purchases certain Developers like to farm buyers out to their friendly conveyancer (i.e the ones who must charge a low fee so buyers agree to use them, and conveyancers who cannot then offer very expert lawyers at such a low fee, so that when they review the legal pack for the first time, things are missed/glossed over, and each subsequent purchase they continue that same mistake/glossing over).

    We are amazed how many times Developers say to us when we act for a new build buyer on a particular development “well, no other lawyer has ever raised that enquiry before”. Never a comfort, always alarming.

    Indeed, we frequently act on new build purchases and we always request the legal pack very early on, BUT also, a highly trained conveyancer then vets it for necessary enquiries – only needed once – without missing anything, and then all the future plot purchases do indeed sail through – but it is the first examination of the pack that is critical. The Developer looks good as they don’t fob rubbish onto our buying clients (as we would have spotted an had it corrected), our clients are pleased and protected, and we did our job. Win win for all.

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  3. Mark Walker

    And remember, all those solicitor / conveyancers are now LLPs…

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