Paragon Blog

2021 January

Ground rent reforms and how to deal with claims going forward

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In continued partnership with Paragon, Beale & Company Solicitors LLP – who provide specialist legal advice to the legal sector – have produced a white paper exploring the Ground rent reforms.

The UK government has announced extensive reforms to allow leaseholders to extend their lease by 990 years and reduce ground rents to nil. The new legislation forms the first part of the package of reforms proposed by the Law Commission last year.

Ground Rents – an escalating problem

The practise of selling new build houses on a leasehold basis – and retaining the right as landlord to charge onerous fees as ground rent or service charges – has been used extensively over recent years by residential housebuilders as a generative additional income stream. The existence of escalating ground rent provisions in leases – which in extreme cases allow ground rent payments to double every 5 or 10 years – has become under increased scrutiny in recent years. This much-criticised side-line has often resulted in purchasing homeowners becoming trapped, as the lease provisions are sometimes so onerous that their properties effectively become unsellable as banks are unwilling to offer mortgages.

In our experience, some housebuilders, who were subject to significant political pressure, were willing to negotiate a buy-out of the escalating ground rent provisions.   Others would force the home owner down the costly statutory process to purchase the freehold.  Professional negligence claims against conveyancers who have failed to identify escalating ground rent provisions in leases and/or inadequately advised prospective buyers on the implications of such provisions have become commonplace in recent years. These claims are usually challenging to defend and conveyancers often find themselves liable for the leaseholders’ costs of extending their leases

Whilst the housebuilders’ commercial approach was welcome relief to the conveyancers’ insurers in terms of liability exposure, the aggregate defence costs incurred in investigating and defending high claims volumes continued to be a concern.

Changes proposed

 The reforms will introduce a number of changes:

  • Leaseholders will have the right to extend their leases by a maximum term of 990 years;
  • There will no longer be any requirement to pay any ground rent to the freeholder;
  • There will be a cap on ground rent payable when a leaseholder extends a lease or becomes a freeholder;
  • Onerous charges, such as ‘marriage values’, which come into force in leases with less than 80 years left, will be abolished;
  • The government’s commitment to restrict ground rents to zero for new leases will now extend to retirement leasehold properties – a move to protect the elderly from uncertain and rip-off practices; and
  • A Commonhold Council – a partnership of leasehold groups, industry and government – is to be established to prepare homeowners and the market for the widespread take-up of commonhold.

The reforms will be welcomed by both leaseholders and conveyancing solicitors alike, whose bargaining position in any lease extension process will undoubtedly be strengthened going forward.

Practical guidance for dealing with claims going forward

Whilst conveyancers may remain liable for leaseholders’ costs of extending their leases, those costs are likely to be lower and more transparent. This should assist without-prejudice negotiations and result in lower settlements – possibly within your professional indemnity insurance excess.

If you have any open circumstances, which have not yet become claims, it may be sensible to await implementation of the reforms before progressing matters. In this vein, if you are approached by a client raising concerns regarding the ground rent provisions in their lease, the client should, in the first instance, be informed of the above reforms which are due to be implemented shortly and the possible impact of these on their situation. Of course, if a claim against the firm seems likely, the client should be advised to obtain independent legal advice.

Going forward, the removal of ground rent provisions in new leases will undoubtedly dampen this current trend of claims against conveyancers – a development which will be welcomed by conveyancers and their professional indemnity insurers.

Whilst the reforms are intended to relieve leaseholders (and their lenders) who have become “trapped” by the escalating ground rents, the proposed reforms will be a welcome intervention into claims against conveyancers and their insurers.

Michelle Bakker and David McArdle, of Beale & Company Solicitors LLP have authored this article.  If you have any questions raised by the content of this article, Paragon, Beale & Company please get in touch using the details below.

CONTACT US – For more information about Paragon, our tailored indemnity solutions and specialist risk management services, please contact:

 

Martin MacHale

mmachale@paragonbrokers.com

T  +44 (0)20 7280 8209M  +44 (0)7854 314 344

 

Ryan Senior

rsenior@paragonbrokers.com

T  +44 (0)20 7280 8254M  +44 (0)7827 575 652

 

The SDLT (no) Holiday scheme – Managing the conveyancing risks involved

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In continued partnership with Paragon, Weightmans’ Compli platform – who provide bespoke risk management and compliance consultancy services – have produced a white paper exploring the possible risks stemming from the SDLT Holiday scheme. In this article they explore the risks, the continued obligations imposed by the SRA, the ever-growing operational burdens and of course some of the actions firms might consider taking to mitigate these risks.

Let’s face it, 2020 has been a rubbish year. The word “unprecedented” has been used an unprecedented number of times and conveyancers will, I am sure, agree that this is a year like no other.

At first, there was lockdown, nothing moved for two months.

And then, to help ease the financial pain experienced during lockdown and to support and stimulate the residential conveyancing market after a very difficult time, the Chancellor introduced an SDLT “holiday” which came into effect on 8 July 2020 and runs through to 31 March 2021. Whilst this was welcomed as a positive move for the economy, leading as it has to a huge surge in instructions to conveyancers across the country, this surge has also created significant risks both to consumers and the conveyancers acting for them.

So, what are these risks?

These have been helpfully identified in letters written to the Chancellor from the Home Buying and Selling Group (dated 29 October 2020), a joint letter from the Society of Licensed Conveyancers / Bold Legal Group/ The Conveyancing Association (dated 17 November 2020) and representations from the Law Society. In summary:

  • Average property transaction times are lengthening as a result of the surge in demand and operational constraints as a result of Covid-19.
  • Delays in the issues of searches – for example, Hackney Council have been the first Local Authority to confirm they won’t be able to complete searches by the deadline.
  • Delays in mortgage offers and additional restrictions by underwriters are causing delays in issuing or extending mortgage offers.
  • The relatively short holiday window ends abruptly based on completion dates which potentially creates a “cliff-edge” of instructions with buyers saying that they will pull out of the transaction if it is not completed before 31 March when the SDLT holiday ends.
  • Delays in obtaining leasehold information from managing agents
  • The operational issues for conveyancers, in addition to the above, include:
    • Reduced team numbers due to furlough, causing a backlog and a reluctance to hire new people to ease the burden and clear the backlog as instructions could drop off rapidly after March 2021.
    • Conveyancers are under a huge amount of stress, working extremely long hours. This is not only causing issues with their mental and physical health but could also potentially lead to important issues being missed and negligence claims further down the line.
    • Working from home and not meeting clients face to face in a stressed environment is increasing the risks of identity fraud and money laundering.

Whilst juggling all these issues, conveyancers also need to bear in mind their obligations under the SRA Principles and Codes of Conduct including:

  • 2 Code for solicitors: “You ensure that the service you provide to clients is competent and delivered in a timely manner.”
  • 4 Code for solicitors: “You consider and take account of your client’s attributes, needs and circumstances.”
  • 1 Code for solicitors: “You identify who you are acting for in relation to any matter.”
  • 5 Code for firms: “You identify, monitor and manage all material risks to your business.”
  • 3 Code for firms: “ You ensure that your managers and employees are competent to carry out their role, and keep their professional knowledge and skills, as well as understanding of their legal, ethical and regulatory obligations, up to date.”
  • 4 Code for firms: “You have an effective system for supervising clients matters.”
  • 5 Accounts rules: “You ensure that client money is returned promptly to the client, or the third party for whom the money is held, as soon as there is no longer any proper reason to hold those funds.” The SRA referred to this at its recent COLP/COFA annual conference on the issue of the SDLT holiday.

So what can conveyancers do to mitigate the risks of negligence claims and/or complaints to the Legal Ombudsman/the SRA?

  1. Managing clients’ expectations will be key. Firms should be advising clients upon being instructed of the difficulties being experienced, including warnings in their client care letters that the deadline completion date may not be achievable and that they cannot be held responsible if it is not achieved as a result of circumstances out of their control. Keep the client informed of delays in the process as they arise so that clients are not taken by surprise as the deadline looms.
  2. Homebuyers are being advised to take out insurance to protect themselves against the risk that the deadline cannot be met. If you are advising on this, make sure that you are complying with the Insurance Distribution Activity rules.
  3. Managing workloads will also be essential. Easier said than done of course but there are reports of solicitors refusing to accept further instructions where clients are looking to complete before March 2021. This avoids the risk altogether but of course, impacts on the firm’s revenue. Turning work away is never easy especially when the expectation is that there will be a downturn after the holiday ends. Commercial decisions need to be carefully balanced against all the other factors including the risk of claims, staffing and their mental health and it would be wise to document your thought process about the approach you have decided to take.
  4. One firm’s loss (or rather refusal to accept further instructions) is of course another solicitor’s gain with reports of some solicitors increasing fees to reflect demand. If you have done this, have you ensured that you remain compliant with the SRA’s Transparency Rules in relation to pricing?
  5. Be alert to your staffs’ mental and physical health and provide support where needed. Your supervision systems will play a part in this as will auditing.
  6. Be extra vigilant about client onboarding and CDD due to the increased risk of identity fraud and money laundering. If it is the fee earner’s responsibility to carry out the identity checks, make it clear to them, maybe via a team meeting, that they must not cut corners on this. If client onboarding is more centralised, or electronic verification/facial recognition technology is being used, this might also reduce the risk and free up fee earners’ time to focus on the legal work.
  7. Care is also needed on source of funds/wealth checks. Are these being carried out in sufficient detail to understand exactly where the money needed for the purchase is coming from? When under pressure, the temptation to tick the box without giving any thought to this increases.
  8. Be careful about requests to pay proceeds of sale to anyone other than the client. You will be breaching SRA Accounts Rule 3.3 if you use your client account to provide banking facilities to a client or third party.

To “Make hay while the sun shines” during the SDLT holiday period will of course be tempting, but be alert to the risks and manage them effectively to ensure that the profits made are not swallowed up by the cost of future claims.

If you have any questions about Paragon, Weightmans, Compli and their services or the above article please do not hesitate to get in touch.

Email – professions@paragonbrokers.com

Tel – 020 7280 8209

This article has been written by Michelle Garlick (of Weightmans LLP’s Manchester Office).

 

 

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