Leases: SRA issued guidance over ground rent concerns
A circuit judge has dismissed a negligence claim over a London law firm’s alleged failure to give a client proper advice on a how much the ground rent would increase under a lease.
Her Honour Judge Baucher in Central London County Court held that not only was the clause not onerous but that Nelsons also gave appropriate advice for the time (2006).
She rejected the claimant’s bid to assess the advice against the standard set by the Solicitors Regulation Authority (SRA) in a guidance note issued in 2022, as this would be trying to fix the conveyancer with the benefit of hindsight.
The SRA issued the note in the wake of public concern about ground rent clauses that increased exponentially.
Arrassey Properties, a property investment company, instructed Nelsons in 2006 on the acquisition of four flats in an East London development.
The initial ground rent in respect of three of the flats was £250 and the fourth flat was £350. The leases all contained the same rent review clause.
This read: “The reviewed rent is to be: the greater of, (1) the ground rent payable prior to the review date multiplied by 150 per cent, and (2) the ground rent payable immediately prior to the Review Date multiplied by the RPI published for the October before that Review Date and divided by the RPI published for the October before the previous Review Date.”
Arrassey argued that this was “highly onerous, oppressive and unusual and presented a substantial hazard or detriment” – by the 10th decade of the leases, even if RPI was low, the ground rent would be over £9,600 per annum, by the 150th year £109,000 and by the end of the 245-year lease over £4.2m.
The claimant said Nelsons failed to inform and advise it of this.
The evidence showed that partner Roy Cowie had drawn the clause to the claimant’s attention for consideration. He told the court that he felt this was sufficient – he did not think he was required to advise in relation to inflation in 100 or 240 years’ time.
He added that he did not consider the 150% increase or an RPI clause to be unusual at the time.
HHJ Baucher agreed that the clause was not onerous, noting that only three of the 115 flats in the development had since seen a deed of variation.
“If the ground rent provisions were onerous or a hazard, I would have expected far more deeds of variation in relation to the block of flats and evidence suggesting other successful sales of flats in the area related to them having different ground rent provisions,” she said.
But even if she were wrong on that, the judge went on, Mr Cowie did enough by simply summarising the clause.
The only guidance available to Mr Cowie at the time was the 13th edition of the Law Society’s Conveyancing Handbook, which simply said: “In long residential leases, fixed increment reviews every 25 to 30 years are more usual.”
The handbook made no reference to the need to explain the exponential effect of a ground rent clause or that a solicitor should proceed as per the detailed requirements in 2022, the judge said: “Clearly guidance and practice changes over time.”
The SRA guidance gives the example of a ground rent that increases from a few hundred pounds a year to more than £70,000 over the course of the first 100 years – far more than the clause in this case.
“This lends further support to my view that the clause was not of an onerous nature,” HHJ Baucher said.
Further evidence that the claimant was “attempting to fix the defendant with the benefit of hindsight” was the fact that its own property agent only raised ground rent increases as an “emerging issue” in 2017.
The judge concluded: “I am not persuaded that at the material time Mr Cowie was required to do more than he did. He set out the provision in the lease and asked the claimant to consider it.
“I am not satisfied that a reasonably prudent solicitor in 2006/7 was required to do more. In my view, in reporting on the title as he did, Mr Cowie met the requisite standard at the material time and therefore he was not negligent.”
HHJ Baucher added that, had she been required to do so, she would have needed “considerable persuasion” that the claimant would not have gone ahead with the purchases anyway.
I think the solicitor would have needed foresight not hindsight.