A failure to provide adequate advice remains high in the pecking order of causes of conveyancing complaints and claims.
In particular, there continues to be an increasing number of claims relating to onerous ground rent provisions in residential leases and claims for failure to advise on Multiple Dwellings Relief. This article also looks at the impact of Covid-19 on conveyancing transactions and how best to guard against complaints and claims that may eventuate.
Onerous Ground Rent Provisions
Traditionally, residential ground rents were low, tens of pounds per annum or at a peppercorn rate (nil). However, figures for annual ground rents have risen along with more frequent rent reviews on terms, which in some cases create high increases over the term of the lease.
A common scenario is where a conveyancer advises the client of the current ground rent but fails properly to consider and advise on the ground rent review provisions, which over time, may increase the ground rent to such a level that it becomes onerous. In turn, this affects the ability to sell, mortgage or re-mortgage the property and most pertinently, reduces the value of the property in some cases significantly.
By way of example, consider a ground rent, starting at £250 and then doubling every 10 years, throughout the 140-year term. By the time of the final rent review, the annual ground rent is over GBP2m and the total ground rent payable over the 140-year term, nearly GBP41m. Indeed, there are some cases where the ground rent provisions have meant an even more exorbitant increase.
This is not only an issue in terms of the disproportionate increase in ground rent, there is another under Part 1 of The Housing Act 1988, where the lease will become an Assured Tenancy if the ground rent is more than £250 per annum outside of London or more than £1,000 per annum in London. As an Assured Tenancy, the leaseholder could be subject to a mandatory possession order for even small sums of arrears of rent. This causes issues with not just the owner’s capital but also the lender’s security.
Whilst liability is always fact specific, a conveyancer owes a duty to fully and clearly explain how the ground rent provisions work and should recommend advice from a valuer (if necessary), so that a purchaser can make a fully informed decision before proceeding. Where a conveyancer fails to give proper advice on this issue, there is a significant risk they will be found to have breached their duty of care.
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Different considerations apply to leasehold flats and houses, but in general terms, very often the solution for the tenant/claimant, is to: negotiate to vary the lease rent review provisions or apply to the court to extend the lease (in the case of flats, with a peppercorn ground rent) or purchase the freehold.
These solutions may involve payment of a significant premium to the landlord, as well as professional, legal and court fees, which the tenant/claimant is then likely seek to recover from their conveyancer.
Some developers and larger investment companies have offered customers (who purchased directly from them but not subsequent purchasers) variations to the ground rent provisions in their leases without charge. However, these variations commonly provide for reviews in line with the RPI every 10 years which may not be acceptable to all lenders.
When settling claims, it is important to consider the lender’s position. Very often, the conveyancer will also have acted for the lender. The lender’s security needs to be protected and therefore, it should always be a term of the agreement that the settlement funds are used to rectify the lease. Whilst it is most likely they would be applied in this way in any event, it is important to guard against a situation where they are not and the tenant defaults on the mortgage and the value of the security is insufficient to cover the loan, as a result of the onerous ground rent provisions.
After growing media and political concern, in March 2019, a government-backed pledge was launched, which committed freeholders, developers, conveyancers and managing agents to take steps to help leaseholders stuck in unfair deals. Some criticise this development, believing the pledge falls a long way short in addressing the real issues surrounding developer leasehold arrangements. Whilst that remains to be seen, what is clear is that the claims concerning onerous rent review clauses are likely to continue for some time yet.
SDLT Annex Relief
In July 2011, Multiple Dwellings Relief (MDR) was introduced. It applies to the purchase of more than one dwelling in a single transaction. If MDR applies, then the Stamp Duty Land Tax (SDLT) on the transaction is not calculated by reference to the total value of the transaction, but by the average value of the dwellings purchased, multiplied by the number of those dwellings. As such, lower rates of SDLT may apply.
For MDR to apply, the properties being purchased in the same transaction must be “separate” dwellings, however determining what constitutes a separate dwelling is not always straightforward and involves careful analysis of HMRC’s requirements.
Higher rates of SDLT were introduced in April 2016, together with an extra 3% levy on the standard rates on the purchase of additional properties (e.g. buy-to-let and second homes). Whilst tax experts began to appreciate the application of MDR to residential purchases, there was still a lot of confusion in the conveyancing industry as to how it applied. The Government provided further clarification in July 2019. This proved a catalyst for claims against conveyancers who had failed to advise, historically, on the correct amount of stamp duty payable (in circumstances where it was too late for the purchaser to apply for MDR, the time limit being 12 months from filing the original SDLT). The majority of the claims involve transactions between July 2011 and March 2016, where a single property has been sub-divided to form 2 dwellings, such as 2 flats or a house and a granny annexe.
HMRC identified various factors to help to determine the status of dwellings i.e. whether they were regarded as separate or single dwellings. These included separate water and electricity supplies and meters, separate access and separate postal addresses.
On 9 April 2020, the First-Tier Tax Tribunal, decided in Fiander and Brower, that a property, consisting of a house and an annexe joined by a corridor, did not qualify for MDR because there was no lockable door on the corridor to separate the two dwellings. The Tribunal found that both met the basic living needs of the residents, each having facilities for sleeping, eating, cooking, washing and sanitary needs. However, the Tribunal found that a sufficient degree of privacy and security is required for a building to be suitable for use as a single dwelling and the open corridor meant that they were too closely physically connected for either to be suitable for use as a “single” dwelling. Caim companies have exploited the position, searching property sites such as Right Move and contacting purchasers, offering to claim the relief if in time and if not, encouraging them to make professional negligence claims against their conveyancers. Possible defences include, whether a conveyancer had a duty to advise on MDR at all (particularly prior to 2016 - when its application was not as clear as it is today); the conveyancer’s knowledge about the property – in some cases there is no indication of two or more dwellings (of course, it is very unusual for a conveyancer to inspect a property); whether MDR would have been allowed – the claimant will need to show his/her eligibility for MDR and this may not be straightforward in some cases. The claimant will also need to demonstrate that they properly mitigated their position by claiming retrospective relief from HMRC, within the time limit of 12 months from filing the original SDLT return. In reality, that 12 month period is likely to have long expired by the time the claim is made.
The industry is continuing to grapple with the legal and practical implications arising from the pandemic and whilst it is too early to predict, it is likely that the risk management issues, arising from changes in working practices, may well give rise to an increase in complaints/claims in the future.
Conveyancing transactions/chains are being delayed and parties are withdrawing, including where:
- one or more parties needs to self-isolate or has died;
- there is a change in financial status e.g. loss of job/drop in investments/change to mortgage offers;
- there is difficulty arranging removals/surveys/valuations.
The Government has issued guidance on moving home in the current situation. To summarise:
- Public and individual’s health is a priority.
- Parties should adapt and be flexible to alter usual practices.
- Where a property is vacant and contracts have been exchanged, the transaction can be continued, subject to guidance on home removals.
- Where a property is occupied and contracts have been exchanged, parties should do all they can to amicably agree alternative dates to move, at a time where the stay at home measures are no longer in place. Anyone with symptoms, self-isolating or shielding from the virus, should follow medical advice which will mean not moving house for the time being, if at all possible.
- For transactions that have exchanged, all mortgage lenders are working to find ways to enable customers to extend their mortgage offer for up to three months to enable them to move at a later date.
Advice to industry
The Government has issued guidance on home moving during the Covid-19 outbreak – to read the latest guidance, please click here.
The Council for Licensed Conveyancers (CLC) has also provided extensive guidance – to view, please click here.
In addition, the Law Society has provided guidance – to view, please click here.
Tips to reduce complaints/claims arising out of Covid-19:
1. Ensure you regularly review and comply with all guidance issued by the Government and the CLC.
2. Manage expectations! The individual circumstances of a particular client/transaction needs to be borne in mind at all times. Advise clients in writing of all the risks associated with the Covid-19 outbreak, the need to comply with Government guidance and the impact of any delay in progressing and/or withdrawing from transactions. If clients ignore the advice given, conveyancers should make sure that advice and their instructions are recorded in writing. In short, conveyancers should ensure the client’s informed consent is obtained before proceeding and that they have a record of it.
3. Plan ahead! Review transactions where contracts have been exchanged and completion is likely to take place during lockdown. Review what action is required, for example:
- Check whether retainer letters and/or contracts need to be varied to accommodate changes/a new timescale. Keep the requirements of Public Health England firmly in mind. The transaction will be governed by the provisions in the contract unless the parties agree otherwise. If the contract is varied, take care not to create a new contract unintentionally. Any revisions to the contract should take careful account of the standard and special conditions. Specific guidance on the drafting of variation clauses can be found here. NB: select from featured PDF downloads)
- Check mortgage offers – what happens if the contract is extended: has the lender’s consent been obtained? Has the client’s financial position changed?
- Review the insurance arrangements.
- Check searches – are they still valid or do they need to be updated. What additional costs are involved?
- Check undertakings – can they be implemented?
- Consider what documents need to be signed and how this is going to be achieved.
- Bear in mind the changes in the Land Registry’s practices over this time and that an extended period of time is being given to deal with requisitions.
4. If contracts have not been exchanged: try and delay the transaction; consider whether specific reference needs to be made to Covid-19 in the contract and/or specific enquiries asked about Covid-19; continue to undertake customer due diligence measures as required by the Money Laundering Regulations; consider all the eventualities that may affect being able to comply with any undertaking required- consider adding a caveat into future undertakings to take account of the risk of delay due to the effects of Covid-19.
5. Ensure your file is in apple-pie order: keep full attendance notes of discussions with clients/other party/estate agent: confirm discussions in writing, as appropriate. Generally, keep an audit trail which can be used should that be necessary in the future.
6. Keep your business practices closely under review: is your technology robust enough to cope with working remotely; are your staff coping? Are you communicating regularly? This is a very worrying time and people cope in different ways and personal circumstances vary - procedures concerning supervision and dealing with sickness need to be kept under constant review.
7. Review procedures about how to prevent money laundering and terrorist financing and keep reminding staff of the increased cyber risk during the pandemic.
8. Contact the Council for Licensed Conveyancers for guidance, as appropriate.
Conveyancers have always faced challenges. The latest is part of a far wider, more serious challenge caused by a global pandemic – Covid-19. These are worrying times but if conveyancers stick to the basic rules of proper communication with their clients, clear written advice and being alert to the extensive guidance provided and challenges being faced, then this will ensure they are in the best possible position to deal with any complaints and claims that arise.
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This article was written for Miller by Jacqui Gillespie, Partner at Plexus Law.