The residential development ground rent market – a purchaser’s perspective! - Dewar Hogan

The residential development ground rent market

A purchaser’s perspective!

The residential development ground rent market – a purchaser’s perspective!

The residential development ground rent market – a purchaser’s perspective!

We are seeing an increasing number of claims lately in the area of newly built flats. Typically these are purchased off-plan, and claims where the purchaser is not happy when he first sets eyes on the finished product have always been common enough. A closely related and topical issue is the status of deposits.

Lately, however, we have had instructions from purchasers who have found that their leases provide for a non-negligible ground rent – £300 per annum, say – which is index linked or subject to review.

This can produce quite worrying results – “Imagine inflation is 5% a year for fifty years, that means by 2067 the ground rent will be £3,500; will that put purchasers off?”, and so on. Mortgagees can also be a little skittish when faced with this sort of clause. It’s true, of course, that even inflation-linked ground rents may be eliminated by a leasehold extension under the 1993 Act but that takes time and costs money.

It can be even worse than that, too. We have seen cases where the “ground rent” being sought was more than £300.

This practice is not confined to flats. One commentator claims that 70% of new houses in the UK are now being sold leasehold. Of course here too the purchaser can obtain the freehold, this time under the 1967 Act (or even extend his lease in some circumstances), but this is hardly a desirable solution. At the moment mortgagees seem to be even more reluctant about lending on houses than on flats in these circumstances, although if the trend continues they will no doubt have to relax their approach in order to stay competitive.

What to say about this? Well, there have been a few pieces in the national media giving housebuilders a fairly harsh press over this practice, so it may be that market forces will remove the problem. Unless that happens, however, what advice can one give buyers?

There’s nothing very original about suggesting that buyers should have a clear idea of what they are expecting, should read the contract they are signing and consider whether that will actually deliver it, and should retain a solicitor who will give them competent and proactive advice. That would certainly be step one. Developers very frequently push buyers towards a recommended solicitor who is acting for many buyers on a development. This will undoubtedly be cheap and quick, but it should in general be avoided. The solicitor will be beholden to the developer for work, and is unlikely to make any recommendations which the developer might consider protect the purchaser’s interest too fiercely.

The second thing to say (and this applies with even more force to expectations of the physical property) is that the purchaser should actually tell their solicitor what they are expecting. In an off-plan purchase the time to say that you don’t agree to the terms of a lease is before signing the contract, not two years later when you are trying to get a mortgage. Similarly, the time to say that that the selling agent promised you that the flat would be fitted out to the same standard as the show flat, or whatever representation you consider induced you to buy the property, is not when you decide you don’t like the look of the finished product. It should be said before you sign up to the standard clause in the contract saying that the only representations you relied on when buying the property were the ones given in replies to written enquiries.

There are several reasons why these clauses aren’t necessarily a bar. First, because the Unfair Contract Terms Act may have something to say about them. Second, because the representations may have induced the buyer to agree to the contractual term itself. Third, because a particularly serious misrepresentation may even be fraudulent and hence override the clause. Finally, because, at a basic level even judges know that actually the solemn promise the purchaser contractually makes that he hasn’t been influenced at all by the glossy sales brochure he was given, the marketing agent’s practised and honeyed words, and the beautifully and expensively appointed show flat, is unlikely to have been read and extremely unlikely actually to be true. But they certainly aren’t helpful. Solicitors should definitely advise their client of the existence of these clauses, tell them to cast their mind back over representations made to them, explain which ones are important, and insist on answers to those being recorded in written enquiries. However, this is typical of the sort of thing which good solicitors do and bad solicitors do not (without the latter necessarily quite crossing the threshold for negligence). It is also something the developer’s recommended solicitor is really most unlikely to do.

It is also interesting to note how developers in this area handle the resulting claims. Usually, like many institutions faced with a claim, they defend themselves fiercely for a long time, (whatever the actual merits of the case) but in our experience they often roll over once the prospect of a trial and the attendant publicity appears. This may be a winning strategy across the board, but in individual cases it can often lead to considerable expense. It often seems as though an earlier clear-headed consideration of the likely eventual outcome might have been useful. It is also surely unwise (as often happens) for a developer to stick with the solicitors who drafted the documentation to advise on any claim. This is for the same reason as above – there is bound to be reluctance to advise too clearly that the documentation may not tie the purchaser down and enable the painless retention of his deposits/part payments quite as easily as the developer would have hoped.