The conveyancers who acted for the purchasers. They have the greatest moral culpability and there are other legal principles at work that suggest they should bear the loss. There are numerous difficulties and obstacles, though.

N.B. Throughout this post, I assume the conveyancers did not explain the ground rent escalator clauses properly, spelling out the grave effects, to their clients. Doing so properly would satisfy their obligations to them. The criticism only applies to a conveyancer who did not do so.

Leasehold

Why leasehold, properly regulated, is appropriate for flats and why it is inappropriate for domestic houses is dealt with in this post. Why leasehold is not a hangover from the feudal system is dealt with here. This post considers the leasehold ground rent escalator scandal. While this could just as easily apply to flats, most of the reported cases in the news have concerned houses.

Ground Rent

Legally speaking, it is said that the three defining characteristics of a lease are exclusive possession, at a rent, for a term (Street v Mountford [1985] 1 AC 809 (HL)). Oddly enough, rent is considered unnecessary. It is not found in the definition of a lease in the Law of Property Act 1925, s 205(1)(xxvii) and was confirmed to be unnecessary in Ashburn Anstalt v Arnold [1989] 1 Ch 1 (CA). It makes sense for short leases, where rent is paid from month to month and there is no capital value in the lease.

The leaseholds in question are long leases, where there is a large capital value in the lease itself, unlike short leases. Consequently they are sold on (‘assigned’, technically speaking) for large capital sums. Since (typically) the responsibility for maintenance is with the leaseholder in long leases and with the landlord for short leases, this is what the layperson would (or would like to) consider ownership. Yet long leasehold shares the same legal conceptual apparatus as a short lease, so the concept and facility of rent endures – at least legally. From a practical point of view it makes no sense at all. If all the value of the lease is in its capital worth, there is no need for rent.

So why have it in long leases? Technically, the answer is not at all clear. Long leases are made by deed (LPA 1925, s 52(1)), so for the lease to be enforceable as a matter of contract law, consideration (payment in exchange) is not required (and in fact the obligations in the lease would constitute good consideration in any event). Many long leases specify a peppercorn as ground rent, which constitutes nominal consideration, but even this is not necessary. Perhaps it is just legal superstition. Traditionally, low (£50) or peppercorn (literally a corn of pepper) annual rents have been specified which, since they do not increase, have at most nuisance value.

Leasehold ‘Advantages’

Of course, this assumes that whoever assigns the lease to the purchaser intends to give them a fair deal. History teaches us that not everyone’s motives are so pure. There are advantages, to the owner of a freehold, of leasing land rather than conveying the freehold. First is that it will eventually revert to them (or their investment company or heirs). Second is that they can extract rents and service charges. Third is that the freehold reversion is itself valuable property that can be sold (again ‘assigned’, technically speaking).

This is not an attractive prospect for lessees (tenants) and we have legislated to enable leaseholders to purchase the freehold reversions in certain circumstances (see here). This can cost serious money, which reflects the fact that the lease has a lower value than its unencumbered freehold equivalent and, as time passes towards the lease’s end, the value of the lease falls and the value of the freehold reversion increases. Buying a leasehold house – a wasting asset – is very far from an ideal purchase, but with the remaining term clearly visible, it is at least an obviously wasting asset and the purchaser can clearly see what he or she is getting into. For technical legal reasons, one cannot have an unending lease (Lace v Chantler [1944] 1 All ER 305 (CA)), but leases can be made very long – thousands of years – in which case, providing there is no forfeiture, the asset is not wasting. One might as well sell as a freehold rather than a leasehold in this case, you might think. But by granting a long lease the landlord can reserve the other advantages to himself.

The mentality of selling like this has manifested itself rather aggressively and in many forms in recent times. It seems like the business strategy du jour is to maximise the number of one’s revenue streams. So, if you purchase a flight from an airline, there are a constant stream of invitations to spend more on baggage, carriage of sports equipment, a reserved seat, access to a lounge, insurance and who knows what else. A £80 return to a popular destination in Spain can soon escalate to £300+ for a sporting holiday. These costs are seldom clearly visible. Up-front and direct exposition of price is passé.

The Leasehold Ground Rent Escalator

The sorry apotheosis of this principle found its way into the worthless leases the victims of this scandal were induced to buy. This is roughly how it is works. An initial ground rent is set at nuisance value. £200 is typical. A clause increasing it is included, providing for an increment every 10 years. The wolf-in-sheep’s-clothing part of the provision is that it does not go up with the market, or with inflation, but instead doubles.

£400? £800? It’s getting expensive, but that’s not a lot compared to the service charges one sees in some blocks of flats. £2,000pa? £4,000pa?

The trouble is that this is what is called a geometric progression, or exponential growth. It’s touched on in GCSE Mathematics. By A-Level, Maths students will be able to work out from a single formula the rent in any given year. And so will anyone who has a good think about the consequences of the provision and is capable of multiplication. Which is most certainly on the syllabus of GCSE Maths and ought not to be beyond the wit of anyone dealing with large capital purchases, let alone professionals.

Unfortunately, laywers are notoriously innumerate. This is clearly not a good thing, since it may have caused the conveyancers to miss a disaster in the making. The same goes for lenders, who should not have lent on such leases because, as both land and security, they are worthless.

After 40 years the ground rent on this hypothetical flat would be £3,200. After 60 years, £12,800. After 80 years, £51,200. Annually. So in years 40–49, the total rent would be £32,000. In years 50–59, the rent would be £64,000. In years 60–79, the rent would be £128,000. And so on. All in a lease that, for the sake of argument was sold for a value of about £300,000 for a term of 99 years, which, if let short term, say, would yield £1,000/month or £12,000/year (or £120,000 for ten years).

It is immediately apparent that after year 60 or so (these hypothetical figures are not inflation-adjusted), the ground rent for a long lease exceeds the rent for a short lease. It is at this point that the lease becomes completely useless. At least in its early years the unlucky lessee can at least enjoy the use of the land. After this point, the ground rent is more than it would cost to go to your local estate agent and rent short term.

The fact that this was hidden is despicable. The honest thing would have been to have sold a 50-year lease. But then no-one in their right minds would have bought it. Revenue streams maximised.

Further Consequences

These leases are worthless. No-one is going to buy such a lease. In fact, no-one, unless they are going to die within a couple of decades, would even want to be given one (for reasons I will come to later). They are unmortgageable for the same reason. The lender would not be able to sell on the lease if they needed to realise their security. Tberefore the lessees are stuck with them.

So once the lease becomes completely useless, it’s time to abandon the land and move on, isn’t it? Wrong. A lease is not only an interest in land but an enforceable contract. The obligation to pay ground rent endures. They may be a facility to surrender the lease unconditionally. I haven’t seen the precise terms of any of these horrors. But the landlord has no obligation to provide such a facility may well not have done. If there is no such term allowing unilateral surrender, the landlord would have to consent to the surrender and, given previous form, may prefer not to, because that would cut off his income stream.

In that case, the consequences for the lessee, sooner or later, are bankruptcy. The landlord cannot extract from the tenant money the tenant does not have, so the landlord petitions for bankruptcy. I would hope that these landlords would finally stop squeezing their tenants by this stage, for the reason that the poor tenant is likely to have very little if not for the reason that it is abominably cruel, but I wouldn’t bet on it. Landlords, especially institutional landlords have form for squeezing past and former tenants. See, for example, Centrovincial Estates plc v Bulk Storage Ltd (1983) 46 P & CR 393 (Ch), a sorry but typical tale of the 1980s property market where a landlord squeezed a former tenant for the rent that the current tenant could not pay (under what was in effect a guarantee). It has been reported that many of these freehold reversions have been sold on to institutional investors.

Given the timing, in most cases the lessee will die before the lease reaches breaking point, i.e. complete uselessness as I have described it. Then what? The lease will descend according to the lessee’s will or on intestacy. Any intended beneficiary of this ‘gift’ would do well to disclaim it. This will finally mean the lease determines and the land reverts to the landlord. As one final piece of black humour, the lessee should leave his or her useless lease to the landlord, which will have the same effect but at least has symbolic value in that it is like throwing a steaming turd into the landlord’s back garden.

So, on these typical facts, what these lessees have bought is a house for life, that cannot be sold, cannot be left by will, goes down in value and cannot be escaped from. All this for roughly the price of a slightly smaller house of normal tenure that can be sold, can be left by will and goes up in value. It is a disgrace. All those involved in it should be ashamed of themselves.

The Villains

It’s been a while coming. If there is to be a legal contest as to who ought to compensate the lessees for this mess, it is between the developer, whoever they sold the freehold reversion to, or the conveyancers who acted for the purchasers. This would require, of course, a defence to the rent term at law, or a cause of action for compensation or setting aside the sale.

First, consider the developers. There have been reports that they told purchasers it would only cost a few thousand pounds to purchase their freehold reversions. If so, why on earth not just sell them freeholds? The figures turned out to be much higher. If these reports are true, that is a gross misrepresentation, and possibly a fraudulent one. But this is a difficult claim to prove and there may be exclusions against non-fraudulent misrepresentations. If it is a statement of opinion, that would bar any claim. It would be at least sharp practice, which makes anyone who committed it worthy of metaphoric villain status if not a wrongdoer, legally speaking.

Second, the purchasers of the freehold reversions. These investors are the new landlords of the luckless tenants, and they will have paid the developers for the reversions. It has been said that they are charging high administration fees to approve trivial changes to the houses. They will benefit from gaining the land after 50 or so years. These people are worse in that they have no other business model and thus are squeezing harder. This is lawful behaviour, but it is thoroughly unpleasant, and, in my opinion, is worse still.

The ground rent escalator clauses appear, unfortunately, to be enforceable. The Unfair Contract Terms Act 1977 does not apply to leases (sch 1(1)(b)). The Consumer Rights Act 2015 (and its forerunner, the Unfair Terms in Consumer Contracts Regulations 1999) may be engaged provided the lessee is dealing as consumer. We know at least that interests in land are within the statute, but buy-to-let purchasers are definitely excluded because they are not ‘consumers’: R (Khatun) v Newham LBC [2004] EWCA Civ 55, [2005] QB 37. Whether a doubling rent escalator clause would be considered unfair (under CRA 2015, ss 62–64) and therefore unenforceable is unclear. The indicative terms in sch 2 pt 1 are of no assistance. There are provisions in ss 62–64 that point either way. A test case is probably necessary.

Retrospective legislation could in theory be passed to enable the leaseholders to purchase their freehold reversions at nominal values rather than the large sums quoted could. There are a number of thorny issues in that retrospective removal of rights are considered contrary to the rule of law. More to the point is that English law and European law tends to prohibit the unqualified expropriation of property, and property is what the developers owned and the investors now own in the freehold reversions. Article 1 of the First Protocol to the European Convention on Human Rights gives everyone the right to the quiet enjoyment of property. There are exceptions, as always, but as a rule the ‘deprivation of property’ is not permitted whereas ‘control of use’ is. Hence the facility to purchase the freehold reversion in the Leasehold Reform Act 1967 is tempered by the fact one has to pay for it. How far a provision could go before it ceased to be control of use and became deprivation of property is not clear. These issues will be considered in full in a future blog post. For now it is enough to know that they are not legally straightforward.

The Real Villains

So that leaves the conveyancers (the lenders have brought misery on themselves by lending on these leases so I’m leaving them out). To me, what makes them the worst of all is that they are supposed to be on the purchasers’ side. It is a dog-eat-dog world, and the current regulation of leasehold is inadequate. The operative principle is caveat emptor, buyer beware. That is why an independent and qualified person, advising the purchaser, is necessary. Yet, in all likelihood, they did not point out the severity of the rent escalator to their clients (any conveyancer who did so is excused). If they had spelled it out (rather than use vague terms such as ‘the ground rent will be reviewed every 10 years’), surely everyone would have resiled in horror. It’s the fact that the conveyancers were supposed to be on the lessees’ side that makes them the real villains.

Since they did not, the suspicion is that many of the conveyancers did not understand, or, worse still, actively downplayed, the severity of the rent escalator clauses (there are rumours that only conveyancers on an approved list could be used). I suspect this is negligence but cannot be sure. A test case is necessary. The main difficulty with this claim is that after six years, such claims are time-barred: Limitation Act 1980, s 5. There may be a case for a late claim under s 14A. A court would have to decide that, within three years of the claim, the lessee had only then acquired ‘the knowledge required for bringing an action for damages’. Since the information would have been in black and white on the lease, albeit not its ghastly conclusion, it is not clear if a court would take this view. You’ve guessed it – a test case is necessary.

A case in negligence against the conveyancer would require the lessee to plead and prove that, plus the elements of contractual negligence. The means proving the conveyancer did not act with reasonable care and skill. I would hope that spelling out the severity of the ground rent escalator would be necessary to meet that standard, but I cannot be sure. It also means proving that the purchaser would not have bought had he or she been advised properly (causation). One would hope that remoteness is not engaged but I would not be surprised if a defendant took it as an issue. Litigation is expensive and risky and legal aid is unavailable for such claims. There are provisions in UK law for group litigation, which may assist because resources would be pooled and risk shared, but they are outside my field of expertise and specialists would have to be consulted.

This neatly avoids the issues around expropriation of property and is the technical reason why this is the best outcome. There is the issue of calculation of damages – how much money a successful claim would yield and whether it would be enough to purchase the freehold reversion – which I will take up in that later blog post.

However, the real suspicion that lingers above this affair is that of collusion. This, I stress, would need to be proved on a case-by-case basis. Were the conveyancers retained by the developers? Were they formally acting for them in the sense that there was a conflict of interests? If this is the case, then morally and commercially this is betrayal. Any such conveyancers are the real villains and, owing to this treachery, villains of a truly terrible kind.

If such conveyancers were full solicitors, they would be fiduciaries in which case such a conflict would be legally actionable. Even if they were not, a court might consider them to be fiduciaries on the facts. If so, the lessees’ cases are made slightly easier is (cutting a long legal story very short) that, for compensation, the burden of proof of causation is reversed (Swindle v Harrison [1997] 4 All ER 705 (CA)) and the level of explanation of that conflict of interest – namely how the rent escalator clause favours the landlord – must be commensurate with the lessees’ sophistication and understanding (Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89 [107]), i.e. it is more likely the court would say unless it were spelled out, the conveyancers were in breach of duty. There is still a six-year limitation period for compensation, but there are exceptions to be considered.

There is one final, remote, chance. If the conveyancers were acting, as fiduciaries, for the sellers and thus there is a conflict of interests, then the sellers would be fixed with notice of the wrongdoing, which means that the sale would be voidable and susceptible to rescission or setting aside. The problem is that the intervention of third-party rights – namely that the investors have the freehold reversions – which the courts might consider a bar to rescission. If they do not, the outcome would be truly poetic justice – the sellers would find themselves lumbered with the worthless leases they pushed on the lessees. I will work out the details in – you guessed it – a future blog post.

Conclusion

The sorry conclusion is that it will not be easy to extract compensation from any of the villains. They are metaphoric villains only unless specific wrongdoing is proven. That will not be easy. Both the worst of the lot, in my opinion are the conveyancers (provided of course, they had not discharged their legal duties).

To the lawyers reading this: apologies for the lack of detail. To the non-lawyers: apologies for the length. To any victims of this scandal: don’t get your hopes up too high. But there is a sliver of a chance.

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