1 / 43

LEASEHOLD CONVEYANCING – AVOIDING THE PITFALLS

LEASEHOLD CONVEYANCING – AVOIDING THE PITFALLS. RAWDON CROZIER. A brief introduction to me. Barrister & mediator in KBG Chambers, based in Plymouth, Truro & Exeter Writes for legal journals, including Landlord & Tenant Review and New Law Journal

astrid
Télécharger la présentation

LEASEHOLD CONVEYANCING – AVOIDING THE PITFALLS

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. LEASEHOLD CONVEYANCING – AVOIDING THE PITFALLS RAWDON CROZIER Leasehold Conveyancing - Avoiding the Pitfalls

  2. A brief introduction to me Barrister & mediator in KBG Chambers, based in Plymouth, Truro & Exeter Writes for legal journals, including Landlord & Tenant Review and New Law Journal Co-author, presenter & exam setter for 3 modules of the Law Society CQS 2018 Update including the Leasehold Module Leasehold Conveyancing - Avoiding the Pitfalls

  3. Is there a Leasehold Conveyancing Crisis? Recent research: National Leasehold Survey 2016 – Survey: 11 January 2016; Report: 29 April 2016 Tackling Unfair Practices in the Leasehold Market – Consultation, 25 July to 19 September 2017; Summary of consultation responses and Government response – December 2017 SRA Understanding consumer experiences of conveyancing legal services – ‘Field work’ 4 - 20 September 2017 but research period preceding 2 years. Published: March 2018 HCLG Select Committee 12th Report - Leasehold Reform - – Inquiry announced 24 July 2018; Published 19 March 2019 SRA Residential conveyancing thematic review – Research: April - November 2018, Published: 5 April 2019 Leasehold Conveyancing - Avoiding the Pitfalls

  4. National Leasehold Survey (2016) 57% Regretted buying Leasehold Leasehold Conveyancing - Avoiding the Pitfalls

  5. Tackling Unfair Practices in the Leasehold Market (2017) Identified practices it described as: “…practically feudal and entirely unjustifiable” • Escalating Ground Rent • The ‘Ground 8 Trap’ • The ‘80 year trap’ • Other exceptionally onerous terms • Disproportionate cost of lease extensions • Poor value property management • A “slow and costly sales process” • Homeowners being “stranded and unable to find a buyer” when they come to sell. Leasehold Conveyancing - Avoiding the Pitfalls

  6. What the Research Tells Us About Progress ‘Understanding consumer experiences’ SRA (Sep 2015 – Sep 2017 approx.) ‘Thematic Review’ SRA (April – Nov 2018) Leasehold Conveyancing - Avoiding the Pitfalls

  7. Some cause for optimism but not good enough The SRA said this (emphasis added): It was encouraging that firms advised clients on key areas of a leasehold transaction including ground rents. However, 23% of firms did not explain the difference between freehold and leasehold property. Several firms said that they saw no reason to do this because they assumed the client would know the difference or the estate agent would have explained it to the client. We consider this a dangerous assumption. We expect all firms to clearly report in writing to clients on whether a property is offered on a freehold or leasehold basis, and what the implications of this are to the buyer. More time should be spent discussing these issues where a client falls into one of the below categories: • all clients purchasing a leasehold property • first time buyers • a client who is purchasing a commonhold property or has instructed the firm to deal with a leasehold • Enfranchisement • a client where there is a purchase of both the leasehold and a portion of the freehold. Leasehold Conveyancing - Avoiding the Pitfalls

  8. What’s being done to improve leasehold conveyancing? Leasehold Conveyancing - Avoiding the Pitfalls

  9. Steps taken by professional bodies • Professional bodies such as the Law Society & The Conveyancing Association are aware of historic problems and are seeking to avoid their being repeated and by way of example: • The Conveyancing association has produced: • Protocol For England and Wales (Third Edition) • Leasehold Solutions Guide For Long Leases in England and Wales • The Law Society has introduced the CQS with its requirement for continuing professional development. Leasehold Conveyancing - Avoiding the Pitfalls

  10. Steps taken by professional bodies Then there are the LPE 1 & LPE 2 Forms which are the result of collaboration between all these organizations: - Leasehold Conveyancing - Avoiding the Pitfalls

  11. A Note of Caution • All of these steps are works in progress; they are not necessarily perfect. • By accident or design new problems will keep arising. • Whatever is done by way of refining protocols, improving training, introducing or improving forms, etc. will be, in its nature, reactive. • It is inevitable that there will be a lag between problems arising and steps being taken to remediate them. Leasehold Conveyancing - Avoiding the Pitfalls

  12. Outline of syllabus for CQS Training • The syllabus is set by the Law Society to provide a template around which competing course providers can design a course. • It’s freely available on the Law Society website and forms part of The Law Society CQS Training Provider Application Form • For conveyancers, the syllabus is worth looking at to see what the core focus of the ongoing training is meant to be but it should not even be regarded as a setting a minimum standard because, although the 2019/20 template is more detailed, it still falls a long way short of setting out everything for which you should be on your guard. • Currently there are 3 providers: The Law Society, Rilliance & Socrates Leasehold Conveyancing - Avoiding the Pitfalls

  13. CQS – Leasehold Course Requirements 2018-19 Relevant knowledge: • Understand the potential dangers to a buyer and lender of a leasehold property, often a new-build leasehold house, where the lease contains provisions for escalating ground rents and other excessive charges • Advising clients of the risks of proceeding where such matters arise i.e. reduction in market value and inability to sell property in the future • Understanding the potential for professional negligence claims against solicitor unless the clients are properly advised Relevant Skill: • Careful study and analysis of the draft lease and advising client Leasehold Conveyancing - Avoiding the Pitfalls

  14. CQS – Leasehold Course Requirements 2019-20 Knowledge: • Understanding what might constitute an onerous lease across all lenders; Part 2 UK Finance Handbook • Understanding how to identify unusual rent review provisions • Understanding the lender requirements as to the remaining length of a lease and a high-level understanding of the rules of leasehold enfranchisement. • Understanding the implications of ground rent exceeding £250 under s8 of the Housing Act 1988 and the potential creation of Assured Shorthold Tenancies (AST) both within and outside of London and how to identify and satisfying lender requirements to have a Deed of Variation in these circumstances. Practice guidance and skills: • Demonstrate the differing lender requirements for both ground rent review mechanisms and length of lease remaining and awareness of the need to check Part 2of the UK Finance Handbook • Understand how to notify lenders if there is an issue that does not comply with their requirements by setting out the issue, the provision in part 1 or 2 of the UK Finance Handbook or the BSA Instructions that is not satisfied and the advice given to the lender client Illustrative examples: • Implications of onerous leases across different mortgage providers • Ground rent and AST • Unusual rent review provisions Leasehold Conveyancing - Avoiding the Pitfalls

  15. Significance of Changes to the CQS Syllabus The “Knowledge” Section, you will see, is more detailed: • Understanding what might constitute an onerous lease across all lenders; Part 2 UK Finance Handbook. • Understanding how to identify unusual rent review provisions • Understanding the lender requirements as to the remaining length of a lease and a high-level understanding of the rules of leasehold enfranchisement. • Understanding the implications of ground rent exceeding £250 under s8 of the Housing Act 1988 and the potential creation of Assured Shorthold Tenancies (AST) both within and outside of London and how to identify and satisfying lender requirements to have a Deed of Variation in these circumstances Leasehold Conveyancing - Avoiding the Pitfalls

  16. Understanding the implications of ground rent • Ground rent is the probably the most important because it impacts on everything else through ‘The Housing Act Trap’. • The trap arises from interplay of s 1(1) and (2) and Sch 1 para 3A of the Housing Act 1988. Leasehold Conveyancing - Avoiding the Pitfalls

  17. The Housing Act 1988, Section1(1) & (2) Section 1(1) & 2 (with emphasis added) are as follows: (1) A tenancy under which a dwelling-house is let as a separate dwelling is for the purposes of this Act an assured tenancy if and so long as— • the tenant or, as the case may be, each of the joint tenants is an individual; and • the tenant or, as the case may be, at least one of the joint tenants occupies the dwelling-house as his only or principal home; and • the tenancy is not one which, by virtue of subsection (2) or subsection (6) below, cannot be an assured tenancy. (2) Subject to subsection (3) below, if and so long as a tenancy falls within any paragraph in Part I of Schedule 1 to this Act, it cannot be an assured tenancy; and in that Schedule— • “tenancy” means a tenancy under which a dwelling-house is let as a separate dwelling; • Part II has effect for determining the rateable value of a dwelling-house for the purposes of Part I; and • Part III has effect for supplementing paragraph 10 in Part I. Leasehold Conveyancing - Avoiding the Pitfalls

  18. Housing Act 1988, Sch.1Tenancies which cannot be an Assured Tenancy Tenancies at a Low Rent 3A. A tenancy— • which is entered into on or after 1st April 1990 … and • under which the rent payable for the time being is payable at a rate of, if the dwelling-house is in Greater London, £1,000 or less a year and, if it is elsewhere, £250 or less a year. _______________________________________________________ • With ‘historic’ levels of ground rent in long leases being below the £1,000/£250 threshold, such leases were generally excluded under para 3A. Leasehold Conveyancing - Avoiding the Pitfalls

  19. The Housing Act Trap From about 2007, many national housebuilders: • Started building more leasehold houses • Included ground rent provisions with escalators in the leases of both flats and houses • The result is that the £250/£1,000 limit can be exceeded and because HA 1988 s.1(2) says “so long as a tenancy falls within any paragraph in Part I of Schedule 1 to this Act” unless another paragraph applies the long lease will become an assured tenancy. • Worse it will be an assured shorthold tenancy if entered into on or after 28 February 1997 because that is what s.96 of the Housing Act 1996 provides. . Leasehold Conveyancing - Avoiding the Pitfalls

  20. The consequences of the Housing Act Trap (1) • ‘The Ground 8 trap’: for even small sums of arrears, leaseholders could be subject to a mandatory possession order if they were to default on payment of ground rent (this was noted in Tackling Unfair Practices at para 75). • There is no relief from forfeiture for leaseholder or mortgagee. • A long lease and an assured tenancy cannot co-exist because of ss 5, 8 & 45 of the Housing Act 1988 & the mechanisms for termination are mutually exclusive - Richardson v Midland Heart Ltd [2008] L & T.R. 31 - so an assured tenancy can only be determined by the landlord by serving a s 8 notice Leasehold Conveyancing - Avoiding the Pitfalls

  21. The consequences of the Housing Act Trap (2) • Ground 8 is not the only mandatory ground which could potentially apply to a long lease not at a low rent, other mandatory grounds, which could apply are: • Ground 7A, conviction for certain offences or antisocial behaviour; • Ground 7B, immigration status; and • Ground 6, if the lease gives the freeholder the right under certain circumstances to carry out work on the leasehold property. • Additionally, while a court may be unlikely to exercise its discretion under any of the discretionary Grounds 9 to 17 in Sch 2, that they may apply at least gives rise to a risk that a leaseholder may end up facing proceedings from an aggressive freeholder • The right of first refusal on a sale of the freehold for leaseholders of flats under the Landlord & Tenant Act 1987 is also ousted because that too has a low rent test. Leasehold Conveyancing - Avoiding the Pitfalls

  22. The consequences of the Housing Act Trap (3) Practical Consequences: Unsaleability Unmortgageability Leasehold Conveyancing - Avoiding the Pitfalls

  23. Identifying & Satisfying Lender RequirementsHaving a Deed of Variation (1) • Some lenders look to a mortgage to value ratio in relation to ground rent and a figure of 0.1% was mooted as a result of evidence to that effect in the Inquiry into Leasehold. Some evidence suggested an increase by RPI was acceptable to lenders • The Select Committee rejected that largely because of The Housing Act Trap • Whatever the ground rent to valuation ratio, in the absence of clear prior instructions, a lender will need to be advised about the Housing Act Trap’s potential application. Leasehold Conveyancing - Avoiding the Pitfalls

  24. Identifying & Satisfying Lender RequirementsHaving a Deed of Variation (2) • Be particularly careful about RPI linked increases; they can still trigger the Housing Act Trap, don’t assume a lender will know that unless they’ve made it clear they do. • A deed of variation to bring the ground rent under the £1,000/£250 limit AND to cap it so the maxima cannot be exceeded (remember the section says “£1,000 or less a year and, if it is elsewhere, £250 or less a year”, so it can be £1,000 or £250) is a very good idea. • If anyone actually succeeds in getting a deed of variation executed, please let me know - and how much it cost. Leasehold Conveyancing - Avoiding the Pitfalls

  25. Onerous Leases & Unusual Rent Review Provisions The “What is onerous?” problem David Jenkinson; Group Managing Director & Main Board Director, Persimmon: “The problem is that there is no real definition of what an onerous ground rent is. If you look at the definitions, there is not really any definition of what onerous is or of what new build is. That has led to a bit of confusion around the numbers and the scale of the problem.” Jason Honeyman; Chief Executive, Bellway: “As Bellway, we do not have any onerous leases. Our standard lease is based upon a rent review based on RPI, which is acceptable to all the main lenders.” - Oral evidence to the MHCLG Select Committee, 19th November 2018 Leasehold Conveyancing - Avoiding the Pitfalls

  26. Possibly time to ditch “onerous” & “unusual” • Not helpful to spend too much time thinking about what “onerous” & “unusual” may or may not mean. • Conveyancing Association advice re rent review is spot on*: “Check any rent review clauses upon receipt of the lease to ensure that they are reasonable and acceptable to a mortgage lender during the full term of the mortgage. Where there are complicated calculations you should run the calculation for any rent reviews during the following 50 years and report the likely increases to the client and, if they appear to be outside of the norm, report to the lender.” • If the effectof a clause is something your client ought to know about, you are under a duty to tell them. *Protocol For England & Wales (3rd Ed) para 6.3 Leasehold Conveyancing - Avoiding the Pitfalls

  27. The duty to Explain (1) Remember the SRA Thematic Review advice: We expect all firms to clearly report in writing to clients on whether a property is offered on a freehold or leasehold basis, and what the implications of this are to the buyer. More time should be spent discussing these issues [with] all clients purchasing a leasehold property This accords with the case law: • County Personnel Ltd. v. Alan R. Pulver & Co. [1987] 1 W.L.R. 916 • Balogun v Boyes Sutton and Perry [2017] EWCA Civ 75; [2017] P.N.L.R. 2 Leasehold Conveyancing - Avoiding the Pitfalls

  28. The duty to Explain (2) County Personnel Ltd. v. Alan R. Pulver & Co. per Bingham L.J. It follows that I cannot agree with the approach of the deputy judge to this matter. I accept the inference which he drew "that Mr. Rose would have explained its effect, namely that the original rent would be reviewed upwards in step with the increases in market value in the headlease." This explanation was not itself entirely accurate, if the headlease rent was below the open market level, but more importantly, it did nothing to alert Mrs. Feldman to the possible risks I have mentioned. The deputy judge found that Mr. Rose gave no further or fuller explanation, but I (unlike the judge) think he was bound in law to do so. I cannot accept the distinction drawn between legal consequences and financial implications, because in this case the significance of the legal consequences lay in the financial implications. Even accepting that Mrs. Feldman was not a naive innocent in the commercial world, I regard this as a classic case in which the professional legal adviser was bound to warn his client of risks which should have been apparent to him but would, on a simple reading of the clause, have been most unlikely to occur to her. Leasehold Conveyancing - Avoiding the Pitfalls

  29. The duty to Explain (3) • The duty to advise is also engaged when there is “real scope for doubt as to the meaning of the wording in a lease” - Balogun v Boyes Sutton and Perry • What Balogun says is that it’s not for the conveyancer to take a view about the risk; being proved right about a contentious point of construction in the Court of Appeal is still negligent, if there was no warning that there was a risk litigation might ensue. • Just as a doctor is under a duty to take reasonable care to ensure that the patient is aware of any material risks involved in any medical treatment - Montgomery v Lanarkshire Health Board[2015] UKSC 11, [2015] A.C. 1430 – a conveyancer is under a duty to explain material risks. • The duty is not fulfilled by bombarding patients, or purchasers, with technical information they cannot reasonably be expected to grasp – ibid. Leasehold Conveyancing - Avoiding the Pitfalls

  30. The duty to Explain (4)An Example of a Perfectly Useless Report on a Lease(This a full, real, but anonymised, report) Lease details are as follows: • Term of Lease: 250 years from --/--/2010 • £295.00 pa payable in advance to -------------------- of ------------------ • The ground rent is £295.00 per annum • and due on the --/-- in each year. • The rent will be reviewed on the tenth anniversary and will double on each tenth anniversary up to the fiftieth anniversary. • In addition, the lease is subject to certain covenants (or restrictions) which could affect your use of the property, for example, requiring consent to alterations specifying insurance arrangements etc. • A copy of the lease is enclosed. • If you have any queries in connection with the provisions of the lease please raise these with us before signing the contract. Leasehold Conveyancing - Avoiding the Pitfalls

  31. The duty to Explain (5) • The ground rent is £295.00 per annum • If outside London (and this property was) the Housing Act Trap was engaged • The rent will be reviewed on the tenth anniversary and will double on each tenth anniversary up to the fiftieth anniversary; what is the effect of that? • On the 10th anniversary in 2020, the ground rent will rise to £1,180, on the next review to £2,360 and by the final, fifth review it will have risen to £9,440. By way of comparison if, over the first 50 years of the lease, inflation were to follow a broadly similar pattern to that of the preceding 50 years, a ground rent linked to RPI would rise to about half that figure. • Drily reciting some terms of a lease and summarizing others, and just enclosing a copy of the lease without further comment in the report or a covering letter, is not giving advice. • What about service charges & permission fees, for example? • The buyer is effectively being left to examine the lease & give him- or herself legal advice. Leasehold Conveyancing - Avoiding the Pitfalls

  32. The Remaining Length of a Lease and the Rules of Leasehold Enfranchisement (1) • Not sure why the new CQS syllabus is so angled towards lenders requirements. A lender may insist on a lease having not less than a particular expired term but getting that wrong is a basic error. • Buyers AND SELLERS need to know about enfranchisement if the remaining term of the lease is approaching the 82-year mark. • Why 82 years? • One element of the premium paid to a landlord is known as ‘marriage value’ but if the lease has over 80 years unexpired, it is ignored because where leases have over 80 years to run marriage value is ignored: Leasehold Reform Act 1967 s.9(1E) Leasehold Reform and Urban Development Act 1993 Sch.6 para.4(2A) • 2 years residence is required before a buyer gains the right to enfranchise but a seller who starts the enfranchisement process can pass it on. Leasehold Conveyancing - Avoiding the Pitfalls

  33. The Remaining Length of a Lease and the Rules of Leasehold Enfranchisement (2) “Enfranchisement” can be used to refer to • lease extensions of flats • collective enfranchisement of flats • the enfranchisement and lease extension of houses The law is different for each and is also complex, arcane & badly drafted. Be aware of enfranchisement issues & get specialist advice if you have concerns. Most importantly spot the issues early so the client is forewarned. Leasehold Conveyancing - Avoiding the Pitfalls

  34. LPE 1 & 2 Forms The LPE 1 & 2, in theory, should supply most of what needs to be known about a leasehold, the LPE 1 covers: • CONTACT DETAILS • TRANSFER & REGISTRATION • GROUND RENT • SERVICE CHARGE • BUILDINGS INSURANCE • DISPUTES & ENFRANCHISEMENT • GENERAL • number of properties, types of lease, whether the building is an HMO • REQUIRED DOCUMENTS Leasehold Conveyancing - Avoiding the Pitfalls

  35. LPE 1 & 2 Forms The LPE 2 is a summary document “designed to highlight to you the key financial responsibilities which you take on as set out in the full Leasehold Property Enquiry Form.” • That fosters the impression the LPE 1 is comprehensive. • It is not. • The last revision was 2015, which pre-dates widespread awareness of problems created by, for example, The Housing Act Trap & Ground Rent Escalators. Leasehold Conveyancing - Avoiding the Pitfalls

  36. LPE 1 & 2 Forms Examples of lacunae in the LPE 1 • Ground rent increases aren’t covered; they may be calculable from the lease but be aware they need to be calculated. • Question 8.7 asks for “Documentation relating to any forfeiture proceedings applicable to the Property” but if the Property is affected by the Housing Act Trap, possession would be sought by a Section 8 Notice not forfeiture • The LPE 1 doesn’t establish whether the service charge is fixed or variable and it only asks at 4.9: “Is any increase in the Service Charge over 10% or £100 whichever is the greater, anticipated in the next 2 years?” • Seemingly innocuous escalators which increase geometrically would not initially, be caught, see example, on next slide. • Fixed service charges are not within the protection of the Landlord & Tenant Act 1985 and cannot be challenged as unreasonable. Leasehold Conveyancing - Avoiding the Pitfalls

  37. LPE 1 & 2 FormsLimitations: Service Charge Example “To pay the yearly sum of Ninety Pounds for the for the first year of the term hereby granted increasing thereafter by ten pounds per hundred for every subsequent year or part thereof” Because the increase is fixed at 10%, the escalator itself will never sound an alarm bell under Question 4.9 and the first year an increase of more than £100 would have to be declared is after he start of year 26. That is why the Conveyancing Association is recommending 50 years of calculation. Leasehold Conveyancing - Avoiding the Pitfalls

  38. LPE 1 & 2 FormsChanges in Circumstances • If, for example, a service charge dispute arises after the Enquiries have been supplied to the buyer, the seller ought to update them - Greenridge Luton 1 Ltd v Kempton Investments [2016] EWHC 91 (Ch), the case involved a commercial sale of the freehold but that does not affect the principle • If an additional service charge liability or any other material change comes to light after the Enquiries have been sent to the buyer the same principle applies. Leasehold Conveyancing - Avoiding the Pitfalls

  39. LPE 1 & 2 FormsAdditional Enquiries (1) The Law Society Conveyancing Protocol, Step 32 advises the buyer’s conveyancer: • Only to raise specific additional enquiries required to clarify issues arising out of the documents submitted, and • To resist raising any additional enquiries that have answers which are capable of being ascertained by the buyer’s own enquiries. Leasehold Conveyancing - Avoiding the Pitfalls

  40. LPE 1 & 2 FormsAdditional Enquiries (2) RAISING ADDITIONAL ENQUIRIES ABOUT GROUND RENT INCREASES • The guidance to those acting for a seller is to not give answers to inappropriate enquiries. • The existence of an escalator and the figures resulting from its application are unquestionably “relevant to the particular nature … of the property” so as to justify raising an enquiry. • Equally, they are ascertainable from the lease, so, if raised by way of enquiry on behalf of the buyer, the enquiry may be batted back by the seller’s conveyancer. Leasehold Conveyancing - Avoiding the Pitfalls

  41. LPE 1 & 2 FormsAdditional Enquiries (3) RAISING ADDITIONAL ENQUIRIES ABOUT SERVICE CHARGES Most service charge issues do not arise as bolts from the blue and the following are warning signs (this is not an exhaustive list): • Discrepancies between charges in the accounts and what is due under the terms of the lease • Late or incomplete accounts • Accounts not prepared in accordance with the terms of the lease • Reconciliations of accounts required by the lease not carried out • Required notices either not given by the freeholder or managing agent or not given in the form required under the Landlord & Tenant Act 1985 and related legislation • Other failures to follow the requirements of the 1985 Act • Outstanding service charge disputes • Previous findings that service charge monies have not been reasonably expended. Leasehold Conveyancing - Avoiding the Pitfalls

  42. LPE 1 & 2 FormsAdditional Enquiries (4) • The ‘Required Documents’ to be disclosed under Section 8 of the LPE 1 require scrutiny because they may well through up warning signals. • Neither Section 8 nor Question 6.2 will necessarily reveal disputes, which say, have been resolved by the First Tier Tribunal, but may have left issues hanging, which have not yet crystallized into a “dispute”. • Past disputes can be indicative of bad freeholders or leaseholders and, where the leaseholders are also the freeholders or responsible for the management of a building through an RTM, bad relations between leaseholders. • There may be justification for raising additional enquiries about past disputes. Leasehold Conveyancing - Avoiding the Pitfalls

  43. RAWDON CROZIER

More Related