Problems used to arise around poor drafting on occasions, or changes in practice, usually leading to non-compliance with Lender requirements under the UK Finance (formerly CML) Lenders Handbook.
However in the last year or two a new problem has arisen with leases, which was not widely predicted. The problems started with some of the large developers selling houses with 999 year lease instead of freehold - to eager first time buyers. They usually had a reasonably large initial ground rent (the yearly payment to the freeholder for simply living in the property), of around £250-£500 per year.
The issue arose the first time the new owners wanted to sell them. The properties were sold with an escalating ground rent, which rose throughout the term of the lease. Then it turned out that the ground rent was set to double either every 25 years, or in some cases every 10 years. At some point someone realised that if you calculate what the ground rent would amount to in future, you quickly came up with an astronomical figure of many thousands of pounds per year and indeed eventually into the millions of pounds, rendering the leasehold title worthless.
Simple. They saw a chance to double their money on the same property.
Why sell a freehold to a buyer of the home, when you could mis-sell a long leasehold title, as being effectively like a freehold as you’d never have to extend the lease, and then sell the freehold title, or the ground itself to a third party, often an investment or pension company looking for a healthy return?
The (often) first time buyer was just excited about being able to buy a new home, and didn’t consider the consequences of the rising ground rent, and if any of them did challenge it, the answer from the developer was invariably a very helpful:
“We have sold many properties on the same terms, take it or leave it.”
Having invested time, money, and emotion into the transaction, the buyer would usually at that point simply proceed.
The publicity around this issue in the press has brought the lenders' attention to leasehold ground rent terms into focus. Lenders started to panic that they were lending on leasehold properties with escalating ground rent, and that their security was somehow at risk, even if the ground rent only perhaps reached a couple of thousand pounds a year in 80-100 years’ time, and started pulling offers of loans as a result.
This, of course, is a classic self-fulfilling prophecy.
If one lender starts to withdraw mortgage offers based upon what would normally be a common, reasonable ground rent escalator, then they would all start to, and before long, you had leasehold homes which were hard to sell, thereby jeopardising the very security the lenders were seeking to protect.
As of January 2019 we now have one lender saying that even if the lease has a peppercorn or £0 ground rent that they may not lend! Where will this end? (Past experience suggest with lenders blaming solicitors for not advising them, justified or not).
The lenders still do not have a common approach to this, and the time must surely come for them all to sit down and take a sensible measured approach to ground rent, and come up with a standard the entire industry can agree to.
It is no use waiting for the Government, busy with Brexit, to legislate on the issue, as the signals from Whitehall are mixed at best.
So the question must be: is there such a thing as a leasehold ground rent which is “just right”, as Goldilocks would say?
Some developers are starting to cotton onto the problem. There are developers who now offer a flat £250 per year ground rent for the duration of the lease term, which is a sensible approach, and one to be applauded, and we hope this approach is adopted more widely. We will have to wait and see.
Make sure you ask your conveyancing solicitor to check the ground rent at an early stage if you are buying, please contact Cunningtons for further advice.
Buying property is a big investment for anyone, so it’s only right that the purchaser should be satisfied about what they are buying.
Likewise, the seller should be entitled to some comfort in knowing that once their property is sold, that is the end of the matter.
During the conveyancing process, the buyer will ask the seller questions about their property. These are called pre-contract enquiries and requisitions on title. As part of the process of selling a property, the seller will normally complete a standard document called a Seller’s Property Information Form.
The idea behind this process is that the buyer satisfies themselves by asking the seller relevant questions, and the seller confirms that the buyer cannot rely on anything else apart from the answers the seller has given. This way, if the seller has been as upfront as possible in response to those questions, the seller cannot be held liable for anything else they say.
Sadly, we see a lot of cases where a seller, sometimes unintentionally but sometimes deliberately, misleads a buyer by answering a question on the Property Information Form incorrectly - or partly incorrectly. The buyer then purchases the property and moves in, only to discover that what the seller’s information was inaccurate.
We have dealt with cases where a seller has:
failed to disclose existing disputes with neighbours,
suggested that a property does not suffer from a flooding issue when it does,
inaccurately maintained that the property does not suffer from Japanese knotweed when it does,
stated that the boundaries are in one place when in fact they are not.
... the list goes on. We have also dealt with cases where a seller has believed that they were answering a question correctly.
In all of these cases, the buyer may very well have a claim for misrepresentation.
Misrepresentation is a false statement of fact which induces a party into a contract. It does not have to be the sole inducement, but the buyer would have to have relied upon it to bring a claim.
Depending on whether or not the seller innocently, negligently or fraudulently answered the questions wrongly in the Property Information Form, the buyer may be entitled to claim damages from the seller. In some cases, the buyer will be entitled to 'rescind' the contract. This means that the buyer is entitled to their money back and return the property to the seller. Primarily for practical reasons, this does not happen very often.
What does usually happen is that the buyer is entitled to damages. Normally the measure of damages awarded to a buyer is based on 'diminution in value', or the difference between what a buyer would have paid for the property knowing about the issue and what they actually did pay for it. This may not necessarily reflect the actual cost to the buyer in rectifying the issue.
To give an example of how diminution in value is calculated, we have acted for insurers in negligence claims against surveyors who failed to identify that a property suffered from subsidence. The measure of damages was based on diminution in value. Sadly, the cost to the buyer in underpinning the property to stop the subsidence was greater than the actual loss suffered. This is because the property was situated in a highly sought after location with a large rental market.
Based on the fact that a hypothetical purchaser would have seen the property as an investment opportunity that could provide a return by renting it to tenants, rather than family home for life, the expert’s opinion was that a hypothetical purchaser would have been more likely to negotiate a smaller reduction in the purchase price than the full cost of the repairs, to make sure that their offer was accepted by the seller.
Sadly there is no way to be 100% certain that a buyer may not make a claim later. All a seller can do is minimise the risk of this as much as possible.
Although completing the Seller’s Property Information Form is not mandatory, it is unlikely that a buyer will proceed with the purchase if their questions are not answered.
Therefore when completing the Seller’s Property Information Form, the seller should answer questions as fully and honestly as possible. We often advise clients to think about what they would want to know about the property if they were buying it.
If a seller is not certain about an answer to a question in the Seller’s Property Information Form, they should think carefully about whether they want to answer it, or perhaps consider qualifying that answer.
Case law is clear that a seller is under a continuing obligation to ensure that their replies to enquires are accurate up to the date of exchange of contracts.
The Seller’s Property Information Form also specifically tells the seller that in the event that something happens which would mean that their replies are no longer accurate, they should notify their solicitor of this, who should in turn notify the buyer’s solicitor. If they don’t do this, the seller risks a potential claim against them for misrepresentation.
The basic position here is ‘caveat emptor’, or 'buyer beware'. If a buyer does not ask the seller a question, they cannot then look to the seller for compensation if they discover something that they do not like about the property. It is up to the buyer to satisfy themselves that they want to purchase the property.
As the basic position in a property transaction is buyer beware, it follows that if no statement or answer is given by the seller, the buyer cannot be said to have relied on it to enter into the transaction.
Having said this, sometimes (but this is unlikely unless a special or fiduciary relationship exists) a misrepresentation can take place by a failure to mention something material to the transaction.
Sellers should be upfront about any issues that affect the property and buyers should take all steps they consider appropriate to obtain the information that they want before committing to a purchase.
If a seller doesn’t know - or is unsure of - the answer to a buyer’s question, they should consider not answering the question.
However, by not providing a response the seller could be putting their sale at risk.
Sometimes the seller's responses are qualified - but before giving a qualified response, it is important to discuss it with your solicitor, as a half-truth can also amount to a misrepresentation.
This article is for information only. It is not a precise statement of the law and should not be relied upon as or for a substation for proper legal advice. The circumstances of every case are different. We are always happy to discuss your circumstances to see if we can assist.
That means that you get a quote, and pay the premium for the insurance as soon as your conveyancing solicitor has confirmed the moment you’ve been waiting for:Exchange of Contracts has taken place.
But why, you might ask, should you insure a property you don’t yet own, and which is in all likelihood already insured by the seller, the person who currently owns the property?
There are a couple of legal reasons for doing so:.
Firstly, if you are buying a property with the help of a mortgage, it is almost certain it will be a requirement of your new lender that your own buildings insurance is put in place at Exchange of Contracts.
Why is that? Surely if the house burnt down between Exchange and Completion, isn't it the seller's problem, not yours?
Unfortunately this is not the case. You have at Exchange now entered a legally binding agreement to buy the house, and you have to complete come what may. The seller has no obligation to you regarding the state of the property, and so your lender will insist there is insurance in place so that if they pay out their mortgage funds, these are recoverable in the event the property cannot be reinstated.
Secondly, as alluded to above, there has been a change in the Standard Conditions of Sale which form the basis of all Contracts for residential property in England & Wales. The “risk” passes to the Buyer on Exchange of Contracts.
However before 2011 the Seller retained the risk, ie. if the property burnt down it was the seller who must claim on their insurance to reinstate the property or either party could rescind (cancel) the Contract and any deposit returned to the Buyer.
This key change in property law occurred in 2011, apparently to reflect the reality that most buyers took insurance on Exchange of Contracts in any event because the seller was not obliged to maintain their insurance until Completion.
However the effect of this change is to place the real burden and risk on the Buyer - so that the Seller has no obligations (other than potentially in trust law, but this is untested under the new Standard Conditions).
It is now essential for any Buyers to take out insurance to protect their investment from the moment Contracts are Exchanged.
A recent case of an unfortunate family in Brighton highlights the issues this can cause: uninsured flooding
The Callahan family Exchanged Contracts to buy a property, and while the sellers were away, the pipes froze, then flooded the property causing about Â£50,000 in damage when they thawed out.
The buyers claim they had not been advised by their solicitors to take insurance at the point of Exchange, and so had none to claim against.
The sellers agreed to assign the benefit of the claim against their own insurers to the buyer, but it looks as though the buyers may only recover about half the cost of the damage, and none of the extra costs they have incurred such as rental accommodation while the works have been carried out.
Even if as a property buyer you do arrange your own insurance at Exchange of Contracts, you should make sure any relevant information is given to your insurer when agreeing cover.
For example, if the property you are buying is unoccupied, you must ensure the insurer is aware of this, as most standard policies do not pay out on properties unoccupied for over 30 days.
There have been cases in the past where both the seller's and the buyer's insurers have refused to pay out on a claim for flood damage after pipes froze and then thawed causing flooding, because the property had been unoccupied for many weeks, the seller had not drained down the system, and neither party had told their insurers until attempting to claim.
So the moral of the story for property buyers is simple: arrange proper buildings insurance, suitable to the circumstances of the property you are buying, at the point of Exchange.
It announced that in a case where a property purchaser had been defrauded by a criminal imposter pretending to be the owner of a property, the solicitor acting for the innocent purchaser should bear the liability for the fraud, and be denied relief from a finding of breach of trust, simply because it was insured and had deeper pockets that the purchaser.
This was in circumstances where the solicitors themselves had not done anything wrong, and had not been negligent (contrary to previous fraud cases, where it had been shown there had been deficiencies in the solicitors' due diligence and in dealing with enquiries of the fraudulent seller’s solicitor).
By way of background to the case, Dreamvar sought to purchase a property in Central London for Â£1.1m, and having “completed” in November 2014 it came to light upon enquiry from Land Registry when dealing with registration that a fraud had been perpetrated. Dreamvar sued their solicitors (Mischcon de Reya) for negligence and breach of trust, as well as the seller’s solicitors for negligence, breach of warranty of authority and breach of trust. The High Court held that the seller’s solicitor owed no duty to the buyer, even though they were negligent. It also refused to uphold a finding of breach of trust for paying away the money in circumstances where there was no genuine completion.
The ruling therefore seemed also to suggest that the solicitor perhaps best placed to prevent the fraud, the solicitor acting for the purported seller, was not liable. This seemed counter-intuitive on a number of levels, not least as there seemed to have been no breach of the well-established warranty of authority.
In the appeal heard last week, the court decided that in this case, the seller’s solicitor was indeed at least partially liable, both due to their breach of warranty of authority, and importantly for breach of trust as they had not paid away the money to effect a genuine completion.
A second, related case was heard at the same time and it was found the “seller’s” solicitor was indeed liable due to inadequate due diligence.
So far, so good. This gives innocent parties in a transaction some ability to seek recompense, and shares that liability among both solicitors acting.
However the effect of the decisions is to make property solicitors the guarantors of a transaction, without any real guidance on how they mitigate the risk, and without the tools to be able to do so.
Furthermore the majority decision confirmed that the High Court was correct not to give the solicitor acting for the buyer relief from breach of trust even though they had acted honestly and reasonably, simply because they had insurance. It is unclear how this can be a just outcome for the solicitors. It suggests the only way they can be granted relief is if the defrauded buyer has insurance as well (which is unlikely). There was one dissenting judge, and this could be grounds for appeal to the Supreme Court.
So what now for conveyancers? There is likely to be some attempt to limit liability by both buyer and seller solicitors.
Can solicitors acting for buyers amend their Terms and Conditions to exclude liability? Probably only with informed consent at the outset of any transaction, such consent being unlikely to be given. Can they seek assurances and further warranty from the sellers solicitor? Such moves are likely to be resisted, although if there is too much resistance, should this lead to an adverse inference anyway?
Will conveyancers acting for sellers seek to alter the code for completion to avoid breach of trust claims? Again such moves will be vehemently resisted by conveyancers acting for buyers.
So, what is the answer? It is difficult to see any short-term solutions here. One long term solution would certainly be updating the Land Registry so it can hold biometric data on all registered proprietors. This would clearly eliminate any doubt.
It will involve investment by the Land Registry, and perhaps now is the time. All the stakeholders in property transactions need certainty, and this would seem to be the most sensible solution.
Is there anything a buyer can do to protect themselves? Good question.There are some sensible steps a buyer can take:
- Most importantly they can appoint a local solicitor who has been perhaps recommended to them, who is CQS accredited, to give themselves the best chance of employing a solicitor who can spot any signs of a possible fraud.
- Secondly, all parties to a transaction may have to show some patience. One thing is for sure, these rulings will mean solicitors have to take much greater care in checking sellers and their title, and ask more questions if they feel anything is amiss.
- And finally, be vigilant! Read the warnings your solicitor gives about paying money to bank details provided by email only without verifying them, try and meet the seller to see if any alarm bells ring, ask the estate agent what steps they have taken to verify the seller, don’t be fobbed off!
In theory at least, you can do your own conveyancing. The reality though, is that it’s simply not worth the risk (not to mention the sheer hassle). When you’re taking ownership of what’s likely to be the most expensive item you’ll ever own, it makes sense not to take any chances.
We have to admit that we’re obviously biased here – and of course we’d be more than happy to have a word with you when the time comes to instruct a solicitor.
Perhaps it’s something to do with being over 250 years old, but we’re not ashamed to say we’re somewhat old-fashioned when it comes to client care. There’s nothing quite like being able to pop into your solicitor’s office to deal with an issue – or even just to drop in some paperwork.
It’s also rather reassuring if you’re dealing with a solicitor who knows the local area, the estate agents, and, very likely, the seller’s solicitors.
Wherever you’re based, “think local” for convenience and personal service. Even then, quality can be mixed. Look for the Law Society Conveyancing Quality Accreditation (this tells you that lawyers in the firm are expert conveyancers).
Also, keep an eye out for the Lexel quality mark (this tells you the firm is managed to a very high standard – which means your calls are going to get answered and your file’s highly unlikely to go astray!).
A handful of other awards are a pretty good indicator of quality too, and if your conveyancers have picked up any prestigious awards then you know you’re in the right hands!
There’s no excuse for a firm of solicitors not to give you a realistic quote right from the outset.
Cunningtons, for instance provides a quote via their website. This is a quote, not an estimate: i.e. it is the figure you will pay barring unforeseen complications.
In a small minority of cases, issues may arise which means there is an inevitable costs overrun. If this is the case, you will be told in advance, and asked if you wish to proceed.
Costs will no doubt be an important factor in determining who to instruct – but look at expertise and reputation too. Ask yourself, “Do I feel at ease handing over the legal side of my house purchase to this firm?”
You should instruct a solicitor at least as soon as the offer is agreed. The seller will want to move fast, so instructing will show you mean business. At the same time, tell your lender which solicitor they will be dealing with.