A law firm is seeking compensation from conveyancers for 500 leaseholders who claim they were not advised properly about ground rents. The development comes as the government seeks to cap ground rents as part of wider efforts to end unfair leasehold practices.
Birmingham and Manchester firm FS Legal, which advises clients in commercial business and private investment, has sent pre-action notification letters to dozens of conveyancing firms. Gareth Fatchett, a solicitor and partner at the firm, told the Gazette that clients may have been told, when they purchased their homes, that their ground rent will increase after a certain number of years, but the implications of the increase were not explained to them.
Fatchett says there are significant risks for leaseholders when the ground rent exceeds £250. These include losing the right to acquire the freehold or extend the lease, which would affect the property's value: 'Firms will have a decision to make - whether they accept they have not provided advice to the standard they should have done. If they accept that they have not, the issue is "what damage have we caused?".'
FS Legal is acting for the 500 people on a conditional fee arrangement. A full protocol letter will be sent to firms before Christmas.
Explaining why the firm, which does not do conveyancing work, has spearheaded the action, Fatchett said: 'We have done, historically, lots of work around pensions, failed investment schemes. We're quite used to dealing with cases where people's main assets are a significant chunk of their savings. With people's homes - it's not a financial attachment, it's an emotional attachment... People have bought something which, if they had known the risk, they would not have bought it or would have bought it at a signficantly different price.'
There are currently 1.4 milion leasehold houses in England. Leaseholders have to pay a rent to acknowledge that they are not the outright owner of the property. However, ground rents on many properties have risen from historically small sums to hundreds of pounds per year. Average grounds rents are estimated at £371 per year for new-build homes and £327 for properties built before 2016.
Publishing a consultation paper yesterday on reforming leasehold practices, communities secretary James Brokenshire said unfair ground rents 'can turn a homeowner's dream into a nightmare by hitting them in the back pocket, and making their property harder to sell'.
The Ministry of Housing, Communities & Local Government wants to cap ground rents at £10 a year. Its consultation paper states: 'We have heard of ground rents as high as £700 being charged for flats in some mainstream developments. Rent levels have risen significantly in the sector over the past 10 years or so, especially for new build flats. In most cases these modern leases permit reviews, with ground rent increases in line with inflation, but there are a number which contain onerous review provisions, such as those that permit the doubling of the rent every 10 years. The significant increase over the last decade reflects the modern practice of buying and selling ground rents as an economic asset.'
The ministry acknowledges that leaseholders must pay a ground rent: 'However, it is unfair for them to be required to pay economic rents at levels which are solely designed to serve the commercial purposes of the developer and any future investors. Furthermore, leaseholders see no material benefits from these payments.'
The government consultation closes on 26 November.