Couple stressed about ground rent costs

“Locked into Leasehold”

What does this mean and what are my options?

The term “locked into leasehold” refers to the unfortunate situation that some owners of leasehold properties (“leaseholders”) are now finding themselves in, as a result of “onerous” clauses in their leases.

For an explanation as to the differences between Freehold and Leasehold interests in property please see:

“Onerous clauses”

The clauses of a lease detail the terms of the agreement and the rights and obligations of each party. Whether or not a clause is “onerous” depends on how reasonable the obligation that it imposes is. Whilst most clauses reflect standard terms, they are all subject to negotiation, and it is this scope for amendment that creates the opportunity for parties to deviate and substitute those standard terms with potentially unfair ones.

It is an established principle in law that unreasonable contract terms should be pointed out, so as to enable full transparency in respect of any risk or implication, before any agreement is made to be bound by them.

During the hearing for the case which established this principle, Lord Justice Denning introduced the “Red Hand Rule”, declaring that the more unreasonable a clause, the greater the notice given should be. He further suggested that some clauses would need to be printed in red ink, with a red hand pointing at them, for the notice to be sufficient.

The most controversial clause in the leases we are looking at, relates to the amount of “Ground Rent” paid by leaseholders and the rate at which it escalates.

For an explanation as to how to identify an escalating Ground Rent clause in your lease, please see:

Why am I “locked”?

Mortgage lenders have recently started to reject applications from purchasers of properties which are subject to these escalating Ground Rent clauses. Leaseholders will therefore find that they are unable to sell their properties without compromising on the price that they were hoping to achieve.

Even to a cash buyer, a property affected by the onerous Ground Rent terms will be unattractive, as the burden of the clause will be inherited via the purchase.

Leaseholders will therefore remain locked into their lease agreements, unable to sell their properties, and forced to continue to pay the escalating rent charges.

Government Intervention

Currently, there are government level discussions taking place, relating to the Ground Rent Scandal. It appears, however, more likely that any resolution will be preventative, which would protect future homeowners, but would not enable retrospective redress for those already affected.

Whilst those discussions do include proposals for provision of support for existing leaseholders, there are no details as to what that support will be and how final or effective a solution would be.

Of more concern to leaseholders is the fact that there is a six year limitation period in law which, once expired, may restrict leaseholders from accessing redress if they do not act soon. For example, a claim for negligent advice against the conveyancer must be brought within six years of the date of the purchase.

Therefore, there could be a significant number of homeowners who will not be afforded the protection of future legislation and end up locked into their leasehold, without being able to bring a claim.

What are the options?

Purchase the freehold or extend the lease

Generally, leaseholders who have owned their property for at least two years, acquire the right to either purchase the freehold or extend their lease (by 90 years for apartments or 50 years for houses) on top of the unexpired term.

Each option will be a costly exercise for the leaseholder. A freehold which is leased and subject to an onerous ground rent clause is a valuable commodity to the freeholder, as it is a guaranteed income stream. With the rent set to increase, Freeholders are likely to set their premiums very high.

The premium will also take into consideration professional fees (including valuation fees and the freeholder’s legal costs), as well as the potential added value to the property.

Professional Negligence

Who’s at fault?

Generally, parties to a contract are free to agree terms, and Courts are reluctant to intervene, except in specific circumstances. For this reason, a claim against the developers or management companies is not likely to be very successful.

A more attractive option is to bring a claim for professional negligence against the conveyancer that acted on the purchase of the property.

In the context of a property transaction, it is the responsibility of the solicitors instructed, to point onerous terms out to their clients, as well as their implications. As, arguably, purchasers would not have agreed to be bound by these terms, had they been made aware of the implications.

Where a solicitor is liable for negligent advice, a claim for compensation can be made by the injured party. In this case, leaseholders who were either negligently advised or not at all, as to the terms of the escalating ground rent, will be entitled to compensation.

How much?

The aim of a compensation claim would be to put the leaseholder into the position that they would have been in, had they not been affected by the Ground Rent Scandal. Simply put, this may be the difference between the value of the property now and what it would be if it did not have the escalating rent clause.

Estimations, provided by a firm of chartered surveyors, suggest that the value of some properties has decreased by as much as 30%, where subject to an escalating Ground Rent clause. This estimation takes account of the amount and rate of escalation, the refusal by mortgage providers to lend, the difficulty in selling and the necessity of attracting a cash buyer.

If successful, the compensation received should be sufficient to allow the leaseholder to purchase the freehold and “unlock” themselves from the leasehold trap.

It is worth noting that leaseholders of an apartment may need to form a “management company”, consisting of at least 50% of the leaseholders in the building, and it is that management company which would acquire the freehold.

Alternatively, a leaseholder may wish to extend the lease, as opposed to purchasing the freehold. This option may be more attractive for leaseholders who wish to use the extension process as a device for renegotiating other terms within the lease, such as those relating to permission fees and service or maintenance charges. For example, an extension of the term of the lease would be an option for leaseholders of an apartment who are unable to meet the 50% requirement discussed above.

Again, any compensation received could be used to meet payment of the premium discussed above.

FS Legal Solicitors

FS Legal is a niche practice of experienced lawyers that has a national client base. The firm deals in complex legal matters in areas such as financial services disputes, professional negligence, regulatory law and property related disputes involving properties both in the UK and abroad.

Over the years, FS Legal has successfully secured compensation for thousands of clients. Our dedicated team of lawyers is currently focused on acting for people affected by the Ground Rent Scandal and has organised meetings up and down the country in order to meet and advise those affected by this issue.

If you would like to know more and would like a free, no obligation chat with one of our lawyers, please contact FS Legal on 01384 889 900.