New-builds: Particular concern
The Solicitors Regulation Authority (SRA) has outlined its concerns that clients “are not receiving appropriate advice” on onerous clauses in leases, particularly around ground rents.
It has spelt out the obligations on them in a guidance note [1], saying that the duty to provide competent advice is not discharged solely by describing the “current” rent charges, referring to the wording as being a “standard clause” or telling clients to read the lease.
The issue has become a high-profile one, particularly around ground rent clauses for new-build properties that increase exponentially over years.
The guidance said solicitors needed to ensure their clients understood the implications of buying a leasehold property and any material clauses: “This includes explaining to your client the effect over time of clauses which increase the rents payable.”
Clients may also need to be advised of other risks, such as that a particular ground rent provision was likely over time to cause the lease to be treated as an assured shorthold tenancy under the Housing Act 1988, by virtue of exceeding 0.1% of the property value or otherwise.
“If this occurs, it will change the nature of the relationship between the client and the freeholder, which could be particularly significant if rent falls into arrears.”
The guidance said that, in its enforcement action, the SRA would generally focus on cases “where there is evidence of seriously or persistently poor levels of competence demonstrating a pattern of behaviour; an example of which might be an overly mechanical ‘copy-and-paste’ approach to advising”.
But single cases could attract action too, particularly “where a firm or an individual has knowingly acted outside their competence or has failed to take reasonable steps to update their knowledge and skills, or those of their employees”.
The SRA stressed the extra obligations on firms recommended by housing developers, such as maintaining their independence, declaring any referral fee and not offering “any improper incentive, either monetary or otherwise, to a housing developer to include you on a recommended list”.
If solicitors discover that clients are being obliged to use their firm, “we expect you to raise the issue with the developer and to advise your client that there is no restriction and that they are free to instruct legal advisors of their own choosing”.
Solicitors should be “especially careful” where the developer has imposed a short deadline on a client to exchange contracts, after which the client would lose some benefit, such as a contribution to stamp duty, or fittings for the house.
“You should recognise that this may cause your client to become vulnerable to exchanging on a transaction without fully understanding it (including seeking further advice if desired) and you should take steps to mitigate any such risks…
“When deciding what regulatory action to take, we will consider whether you took advantage of your client’s vulnerability.”
Separately, in its levelling-up white paper published this week, the government committed to banning new leasehold houses and new financial ground rents.
It added: “The home buying and selling process which can be expensive, time-consuming and stressful will be improved.
“Around a third of all housing transactions fall through, costing people hundreds of millions of pounds each year.
“The UK government and the industry will work together to ensure the critical material information buyers need to know – like tenure type, lease length and any service charges – are available digitally wherever possible from trusted and authenticated sources, and provided only once.
“If necessary, the UK government will legislate.”