Category: Ground Rents

Categories
Ground Rents

RECOMMENDED SOLICITORS & INCREASING GROUND RENTS; DISCOVERING HOW RECOMMENDED SOLICITORS WERE SELECTED

This article will focus on how it might be established whether there was a pattern in the appointment and rejection of recommended solicitors by developers, which meant that their recommended solicitors, as a group, were likely not to warn buyers about the risks associated with escalating ground rents

Cost has been advanced as a benefit of having “recommended”, or “panel”, solicitors in the purchase of new build leaseholds because title only has to be reviewed once but if reviewing title (which would include the terms of the lease) is only done once, by one individual, and an onerous term is overlooked, there will be no mechanism for correction; later purchasers will all fall with the first, like a chain of dominoes.

This problem is compounded if the selection of recommended solicitors has skewed the advice given.

This is a slightly revised version of the second of what will be three articles on recommended solicitors and how their recommendation by developers of new-build leaseholds with escalating ground rents may have impacted on the advice received by individual buyers. This article will focus on how it might be established whether there was a pattern in the appointment and rejection of recommended solicitors by developers, which meant that their recommended solicitors, as a group, were likely not to warn buyers about the risks associated with escalating ground rents. The third article will deal with possible remedies against developers although there may well be a bit on the more obvious remedy of claiming against the conveyancer who acted in the purchase and also on the critical question of what might constitute an onerous lease.

As with my preceding article I emphasise that I am not suggesting that all those who acted as recommended solicitors failed the buyers for whom they acted, nor am I suggesting that those who were not recommended solicitors were immune from failing to detect and advise upon onerous lease terms. I should perhaps add two further caveats, first that those solicitors and conveyancers, recommended or unrecommended, who discharged their duties properly and explained the onerous nature of ground rent clauses are unlikely to have attracted publicity in the way that those who failed or are alleged to have failed in their duties are likely to have done. The second caveat is this: different developers had different leases and that which has attracted the most publicity was a particular lease offered by Taylor Wimpey, beyond that, what constitutes an onerous lease is a subject of debate (it is something with which I shall deal in the third article) and the majority of developers would deny that they have offered leaseholds subject to onerous terms.

Before going on to consider how it might be established precisely how recommended solicitors came to be selected, let me explain a little more about why it may be important.

Recommended solicitors did not appear from thin air; in evidence to the Housing Communities & Local Government Select Committee on the 18th November 2018, Jennie Daly, who sits on the board of Taylor Wimpey, said this:

“To assist customers, Taylor Wimpey does, as do many of our competitors, identify solicitors who are familiar with the development, operate locally and are familiar with new home sales.”

and, also in evidence the same day, Jason Honeyman, Chief Executive of Bellway, said:

“We provide a local list of solicitors on each development and often get asked by purchasers for assistance, whether it is flooring contractors, solicitors, curtains and carpets, those types of things. We have a list of solicitors that are local to that development. We would put on that list where we have previously had experience that they are providing a good service to our customers. There are no commercial relationships between Bellway and any solicitor. We have never received any referral fees. That list will change from region to region across the country.
“If I could just explain the purpose, some conveyancing solicitors are set up to work with new builds, to run volume through their business because they have a lot of conveyancers. Those types of solicitors are used to working on developments such as ours or Taylor Wimpey’s. Some conveyancers are more boutique, or there are just one or two partners in that practice, and would be slower and less helpful. We always find the repetition and the volume guys provide a better price to the purchaser and are more used to that type of land.“

As I will explain further below, the main problem is unlikely to have been any deliberate collusion between solicitor and developer but whether the selection of “recommended” or “panel” solicitors, skewed the advice intending purchasers were likely to receive.

Jennie Daly’s reference to “identify[ing] solicitors who are familiar with the development” suggests that recommended solicitors must have had a level of pre-selection contact with developers because, short some improbable recourse to physic powers, a solicitor could have no familiarity “the development” unless the developer had provided sufficient information to have brought about the necessary familiarity.

The question which follows naturally from that, is to what extent did interaction go both ways? For example, did the potential panel solicitor provide a sample report on title and/or a letter of advice or give some prior indication of their likely content? If so to what extent was the selection of recommended solicitors dependent upon what went back to the developer? To what extent were there warning signs about onerous terms which were overlooked or which resulted in solicitors providing a cautionary report on title/letter of advice being rejected?

Just as importantly, might the very fact of establishing a panel have impacted on the advice potential purchasers were likely to receive?

Consider this: a firm of solicitors is approached to see if it might be interested in becoming a recommended solicitor for a developer, there will be a quantity of work involved (note Jason Honeyman’s reference to the “repetition and volume guys“) and if problems with a particular lease are picked up and the firm’s advice is likely to be “this lease has onerous terms and you ought to think very, very carefully before proceeding any further with this purchase”, the firm may well anticipate that the volume of conveyancing work it is likely to receive will dry up very quickly and judge that this is not the development on which to be a recommended solicitor. The firm which fails to see the problem, on the other hand, will not be put off and may well in due course become a recommended solicitor.

Another issue is that every client of a solicitor is entitled to expect that the advice they receive has been considered on their behalf, or, if it is not to be considered individually, at least to be told that the benefits of a lower cost may be at the expense of individual scrutiny. The indications are that there was no individual scrutiny, in this regard, not only may the already cited reference to the “repetition and volume guys” be pertinent, but also this later exchange between the Chair of the Committee and David Jenkinson of Persimmon Homes:

David Jenkinson: Can I just explain? The real reason Persimmon uses a panel of solicitors is to save the customer money because they only need to review the title once. If you go each individual time, the biggest part of actual cost from a sale is to review the title.
Chair: You are saying, “That is the solicitor to go to because they will do it more cheaply for you”.
David Jenkinson: No, they will save them the cost of doing the title.

The saving of costs was also mentioned in the latest evidence given to the select committee but the potential difficulty is that, if reviewing title (which would include the terms of the lease) is only done once, by one individual, and an onerous term is overlooked, there will be no mechanism for correction; later purchasers will all fall with the first, like a chain of dominoes.

Establishing the mechanics of the process of selection is potentially important because it may go to whether the advice received by purchasers could properly be characterised as truly “independent” or whether the overall circumstances are such that a duty of care could be imposed in relation to the selection of recommended solicitors under the principles enunciated by the House of Lords in Caparo Industries Plc v Dickman [1990] 2 A.C. 605 (I will deal with this more in the third article). How might this be done?

There is already a campaign for an enquiry into leasehold mis-selling and a judicial enquiry with power to compel the attendance of witnesses and to order disclosure of documents, would have the powers necessary, provided the use of recommended solicitors was included within its remit, to establish answers to the questions posed in the first part of this article, which are expanded and set out in point-form below:

  • What were the mechanics of the selection process?
  • Who approached whom and what were the terms of that approach?
  • What criteria did the developers apply in selecting solicitors?
  • Did developers either ask for examples of reports on title and letters of advice from potential recommended solicitors or were the developers otherwise aware of the solicitors’ general practice?
  • Which solicitors were rejected and why?
  • Which solicitors declined to act as recommended solicitors and were their reasons for declining ever established or followed up?
  • Was there a discernible pattern in the acceptance and rejection of recommended solicitors?
  • To what extent were developers aware of the pitfalls of escalating ground rents?
  • How consciously did developers pursue a strategy to ensure sales of what many buyers would now describe as “toxic leaseholds” were not impeded by properly cogent legal advice?

Others may well come up with additional questions.

Naturally, some people will suspect there was deliberate collusion between recommended solicitors and the developers and, of course, any enquiry should investigate that possibility assiduously; personally I am sceptical that there was deliberate collusion, and, to the extent it may be found to have occurred, I doubt that it was widespread – but I may be wrong and certainly questions asked by the Select Committee suggested evidence had been received of recommended solicitors being pushed by developers’ sales staff was worrying, if not direct evidence of collusive behaviour.

I hope I am not wrong about collusive behaviour, however, because it would point to a much deeper malaise at the heart of the conveyancing professions than I believe exists. Most conveyancers, I think, endeavour to do their honest best, Sadly that honest best may not always be good enough and, that leaseholds with escalating ground rents were sold in such numbers, is indicative of widespread shortcomings in conveyancing practice. Honest errors, however, are capable of being remediated by better education and training (which is why I am happy to have played my part in that by being involved with training webinars for the Conveyancing Quality Scheme for the Law Society) whereas the causes of dishonest errors are not so easily remedied.

Of the various ways of establishing what happened with recommended solicitors, my first choice would be a judicial enquiry. A lesser form of enquiry without powers to compel attendance of witnesses and the disclosure of documents would, in my view, be stonewalled and would, in all probability, fizzle into something inconclusive and unsatisfactory.

But there may not be the stomach for a judicial enquiry in Government circles, certainly not with the MHCLG under its present Minister, who has already expressed the view, in effect, that the past cannot be corrected. What options might individual leaseholders be able to pursue?

There are essentially two options both involving litigation whether by an individual or a group of individuals. The first, making a claim and seeking disclosure in the course of it, would be inherently risky. Making a substantive claim involves having a formal statement of case set out and framing a claim with the requisite degree of precision before disclosure has been obtained would be difficult. Disclosure can, however, be obtained before the issue of proceedings under CPR r.31.16 where:

  • the applicant and the respondent are likely to be parties to subsequent proceedings;
  • if proceedings had started, the respondent’s duty by way of standard disclosure, set out in rule 31.6, would extend to the documents or classes of documents of which the applicant seeks disclosure; and
  • disclosure before proceedings have started is desirable in order to –
    (i) dispose fairly of the anticipated proceedings;
    (ii) assist the dispute to be resolved without proceedings; or
    (iii) save costs.

There is no jurisdictional requirement that a claim must have a minimum level of merit – ECU Group Plc v HSBC Bank Plc [2017] EWHC 3011 (Comm)

Questions of merit are properly considered as part of the court’s exercise of discretion in the context of the particular case – Smith v Secretary of State for Energy and Climate Change [2013] EWCA Civ 1585, [2014] 1 W.L.R. 2283, [2013] 12 WLUK 173.

In the case of a purchaser who had used a recommended solicitor and purchased a leasehold property from a developer:

  1. the direct contractual relationship between the parties,
  2. the well-established history of concern about the role of recommended solicitors
  3. the likelihood that disclosure may well determine whether in a particular case any claim should be brought, and
  4. that any application could be focused in time on the period when, in relation to any particular development, recommended solicitors were appointed.

would probably militate in favour of pre-action disclosure.

One thing that would be very hard to maintain as a ground for opposing disclosure would be legal privilege. It has been central to the developers’ position that there was no contractual relationship between themselves and recommended solicitors; claiming privilege would be dependant upon some form of retainer having existed.
Insofar as there may be an issue of limitation, the fact that developers have maintained throughout that the buyers received independent legal advice, would, if it turned out that the advice had not been truly independent, probably engage the concealment exception under Limitation Act 1980 s.32(1).

The position would be quite closely analogous to that in ECU Group Plc v HSBC Bank Plc (above), which concerned an allegation of “front-running” on the currency markets: long-standing suspicions dating back to 2006 did not amount to knowledge of the fact, and the company could not with reasonable diligence have discovered the truth at the time as all the relevant information was in the exclusive possession of the bank.

Applications for pre-action disclosure do have the disadvantage that the reasonable costs of providing the information have to be borne by the applicant but where an application could be pursued by a group of purchasers that would reduce the individual costs. However given that such applications would probably need to be pursued on a development-by-development basis, the saving in time & cost of investigating the interrelation between recommended solicitors and leasehold mis-selling as part of a judicial enquiry would seem a compelling argument in favour of that course.

This blog post does not constitute legal advice and no duty of care is assumed by the author to anyone reading this post or acting upon its content.

© Rawdon Crozier 2018. This Note is copyright and the author asserts his right to be identified as the author. It is licensed for onward NOT FOR PROFIT transmission only, on terms that the author must be identified as such.

Categories
Ground Rents

ESCALATING GROUND RENTS & THE ROLE OF RECOMMENDED SOLICITORS.

Below is the text of a brief submission I made to the DHCLG but first a little additional background as to why I made it.

The role of recommended solicitors has been much commented upon and has generated a fair amount of fury on the part of buyers who felt themselves inadequately advised about escalating ground rents. A survey by the Leasehold Knowledge Partnership found 71% of leasehold house buyers used developer recommended solicitors. The possibility of claims against recommended solicitors has been widely canvassed in the media, as another article on the LKP website illustrates, but beyond that and a general expression of outrage, the “recommended solicitor problem” has not been forensically analysed, hence the submission below, which asks in effect “How did recommended solicitors get recommended by developers of new-build leaseholds with escalating ground rents?”

When new-build leaseholds with escalating ground rents started to come on to the market (from about 2009), it is a matter of record that many solicitors were not alive to the pitfalls with which such properties came but it is unlikely that they were all unaware. Notwithstanding this, the lack of awareness seems to have been particularly widespread among recommended solicitors. Let me make this clear, more research is needed and I am not suggesting that all recommended solicitors failed buyers, let alone making any comment on individual cases, but, if it is right that the unawareness was particularly prevalent among recommended solicitors, it is a legitimate area of enquiry to ask how that might have come about?

This is what I said in my supplementary submission:

I have already made one submission but given the extended deadline I thought I ought to add something re one matter I had neglected to comment upon which is the role of recommended solicitors in relation to leasehold mis-selling. I think the selection of recommended solicitors by developers has been insufficiently considered.

It is a matter of record that many buyers of “new” leaseholds with escalating ground rents complain they were not properly advised by recommended solicitors.

It does not seem to me that the process of how solicitors came to be recommended has been considered.

Did developers, for example, select solicitors to recommend on the basis of draft reports on title?

If so did developers effectively make their recommendations based on the advice they knew in advance such solicitors would provide?

If so there is a case for saying that, even if the solicitors acted in good faith, the developers had assumed a duty of care towards the buyers and ought to be liable for the advice buyers received.

Given that the current Minister has indicated reforms are not going to affect past transactions this may be of some importance as to the justification for such a course.

Ibraheem Dulmeer of the Leasehold Advisory Service and I wrote about the chequered history of recommended solicitors and the potential ethical difficulties of acting as a recommended solicitor in the Law Society’s ‘Property in Practice’, Issue 59, June 2017 in an article reproduced on Lease’s website . On the back of that I was invited to supply the leasehold module for the Law Society’s Conveyancing Quality Scheme 2018 update, which I did with an experienced conveyancer, Suzanne Broughton of Wolferstans solicitors (in fact we ended up contributing 3 of the course modules). The specification for the leasehold module specifically asked that we should cover:

  1. Understanding the potential dangers of buying or lending on leasehold properties with leases containing provisions for escalating ground rents and other excessive charges
  2. Advising clients of the risks of proceeding with such transactions.
  3. Understanding the potential for claims against conveyancers if clients are not properly advised.

This is something, I take as an implicit endorsement of the original article, and its cautions about the position of recommended solicitors. Those cautions are now expressed in amplified form in the CQS 2018 leasehold module.

This is why it would be interesting to know how recommended solicitors were selected. Not only about the mechanics of the selection process, but the criteria the developers applied. It would be interesting to know too, what solicitors were rejected and why? Most of all it would be interesting to know how aware of the pitfalls the developers were and how consciously they pursued a strategy to ensure sales of what many buyers would now describe as “toxic leaseholds” were not impeded by properly cogent legal advice.

If there was a pattern in the appointment and rejection of recommended solicitors which meant that  recommended solicitors, as a group, were likely not to warn buyers about the risks associated with escalating ground rents, or at least not in terms which buyers would readily understand, to what extent can the buyers be said to truly have had independent legal advice?

In this scenario, those who acted as recommended solicitors and who did not give adequate warnings about escalating ground rents, may have been entirely innocent of any collusive behaviour with developers but, in their selection, the advice given to buyers may, nonetheless, have been pre-determined by the developer.

That is why I do not think it is enough for the Government to say in effect: “This has all turned out terribly and (when eventually we have time to legislate) we will make sure it doesn’t happen in the future but the past is the past and we can do nothing about that.” Unless and until the role of recommended solicitors has been investigated and in a thorough and forensic way, the suspicion will remain that something did not simply go wrong but was caused to go wrong and, if the advice given to buyers was controlled by developers, it would be very much harder to justify letting what happened in the past go by uncorrected.

Categories
Ground Rents

ESCALATING GROUND RENTS: THE EVIDENCE (SUCH AS IT IS)

“The point that I am trying to make is that these onerous clauses, leases and terms do not get there by accident; they are put there by whoever wrote that lease to start with. The developer has set out to do that, and then the management company and the managing agent continue to make these excessive charges. We need to look at sorting that out, so the onerous clauses are not there to be explained to a buyer by either the estate agent or the conveyancer. They should not be there in the first place.“
Beth Rudolf, Director of Delivery, Conveyancing Association giving evidence to the HCLG Select Committee’s Inquiry into Leasehold 10th December 2018

This is another piece about the problem of “modern new build leaseholds” subject to increasing ground rent clauses and other onerous terms but it is not the promised third article in the series leading up to possible remedies against developers – that is in the pipeline – but as the HCLG Select Committee’s Inquiry into Leasehold progresses, some interesting evidence is emerging.

The point made by Beth Rudolf, giving evidence on the 10th December 2018, quoted at the top of this post would appear self-evident, but it was not one put to Jennie Daly of Taylor Wimpey at the previous session on the 18th November 2018, when the following evidence was given:

Jennie Daly: … Taylor Wimpey does have a voluntary assistance scheme for our customers who were affected by a specific 10-year doubling ground rent clause. We took the matter extremely seriously when it was brought to our attention around autumn 2016. The reason for that timing is that the leases we created with that specific clause were used on new developments between 2007 and 2011, and they were coming up for their first doubling and were starting to cause concerns to customers.

Before proceeding, let me be very careful here, Jennie Daly is a recent appointee (April 2018) to the Taylor Wimpey board and her knowledge of what happened historically will be derived from what information she will have received from briefings and, possibly what she has established by her own research, and although she joined the company in 2014, it is not even necessarily the case that she was part of the “we” to whom she was referring when she said:

“We took the matter extremely seriously when it was brought to our attention around autumn 2016.“

But, having given all those caveats, and making it clear moreover, that nothing which follows suggests Jenny Daly was doing other than her best to give the evidence as she understood it to be, that answer bears rather closer consideration. The “matter” was not a previously undiscovered manufacturing defect in a product, which may well only come to a manufacturer’s attention after a product has been in circulation for some years, it was:

“a specific 10-year doubling ground rent clause“

which, as Beth Rudolf rightly observed, is one of those terms which

“do not get there by accident; they are put there by whoever wrote that lease to start with.“

Jennie Daly did go on in her evidence to say of the clause:

“The reason for that timing is that the leases we created with that specific clause were used on new developments between 2007 and 2011, and they were coming up for their first doubling and were starting to cause concerns to customers.“

but it follows that “the matter” that was taken “extremely seriously” can only have been that people were starting to notice and complain about the draconian effect of the clause, not any concern on Taylor Wimpey’s part that the clause had been drafted and inserted in these leases in the first place.

The bland reassurance, with its apparent edge of candour, that “the matter” had been “taken extremely seriously when it was brought to our attention” averted a whole raft of other questions that might, reasonably, have been asked about how the clause originated and just how anyone thought it was justifiable in the first place. The question might that equally have been asked was: if the clause was not used after 2011, how had the change been sanctioned without someone, somewhere in the company, having had it brought to their attention?

While that last question will have to be left hanging, there is actually some evidence about the genesis of the doubling ground rent clause and, strangely, it comes from 2007, when the clause was first introduced.

On Tuesday 25 September 2007 in an article entitled ‘New warning on small print’ with the sub-heading “We unearth a disturbing new trend in leases – a buried clause that that means ground rent can double in 10 years” Homes & Property Newsletter told the tale of an intending purchaser in of a flat in a Taylor Wimpey development in Mill Hill; the report quotes the intending purchaser, who had demanded the return of his £2,000 deposit as saying:

“Even first-time buyers know about ground rent, but they expect it to be a small and fixed amount, as it has always been, … But in my case, when I looked through the 19-page draft lease from Taylor Wimpey for a modest flat in Mill Hill, I discovered that the initial ground rent may be only £300 a year — but by 2057 it would be £9,600.”

The Taylor Wimpey did return the deposit as a gesture of “goodwill” but their response, also quoted in the report, is enlightening:

“[the rent review is] George Wimpey UK policy and is in place on all leasehold developments … Historically, most ground rent review clauses were tied to the Retail Price Index (RPI). But house price inflation has significantly outstripped RPI, and developers are looking at terms and conditions that better reflect this.”

The source of the latter part of this quotation (and one presumes the first part as well) was David Bridges, who, from his biography on LinkedIn, served with Taylor Wimpey:

“April 2007 – June 2008
Headed up Sales & Marketing, Strategy & Partnerships, Sustainability and Start-ups. Sat on the Board of Taylor Wimpey UK, a £4b turnover business which delivered over £600m profit in the year to the end of December 2007.“

which indicates, not only that the clause had been inserted as a matter of considered policy but that the handling of the buyer’s complaint in 2007 had reached up to board level.

I should add, that although I have not researched this closely, from my experience, the reference to ground rents “historically” being linked to RPI would require quite an extended meaning of “historically” to include the relatively recent. My experience would accord more closely with what was said to Homes & Property Newsletter by the intending buyer (who, my researches suggest, was a chartered surveyor):

“Even first-time buyers know about ground rent, but they expect it to be a small and fixed amount, as it has always been …I have since spoken to several solicitors who confirmed that, like me, they had never heard of this, and described it as outrageous … ”

Much of what is in this post was covered by a piece by LKP at the end of 2016, indeed Jenny Daly’s reference to the matter having been brought to Taylor Wimpey’s attention in 2016 may be a reference to the LKP’s having raised the issue of doubling ground rents with Taylor Wimpey then. Be that as it may, the recent evidence to the Select Committee adds a new topicality to the story and certainly justifies revisiting it.

Categories
Ground Rents

NOTES ON A SCANDAL: FREEHOLDERS & MEDIEVAL ROBBER BARONS (PT 2)

IN BRIEF
Could the Housing Act Trap render escalating ground rent a derogation from grant? Summing up his series on the unfairness of escalating ground rent, Rawdon Crozier proposes a way out of the dungeon (see NLJ,8 March 2019, p13
New Law Journal, 5 April 2019, LEGAL UPDATE Property, page 13 – http://www.newlawjournal.co.uk

Part 1 of this speculative article ) explained the Housing Act Trap. Part 2 explores whether the trap might render escalating ground rent a derogation from grant and thus, as a matter of law, capable of being struck down.

Derogation from grant: the principle
‘The expression “derogation from grant” conjures up images of parchment and sealing wax, of copperplate handwriting and fusty title deeds. But the principle is not based on some ancient technicality of real property … it is a principle which merely embodies in a legal maxim a rule of common honesty. It was imposed in the interests of fair dealing.’

Johnston & Sons Ltd v Holland [1988] 1 EGLR 264 at 267J

 

Derogation from Grant is a Rule of law
Megarry & Wade (Law of Real Property, 5th edition) described derogation from grant as a free-standing and independent rule of law, an analysis endorsed by the Court of Appeal in Johnston & Sons Ltd v Holland [1988] 1 EGLR 264.

It applies to all forms of grant and, while commonly associated with leases and other contracts relating to land, it is also encountered in contracts concerning:

    • Intellectual property, eg Gloucester Place Music Ltd v Le Bon [2016] EWHC 3091 (Ch) where the serving of notices by members of Duran Duran under the United States Copyright Act 1976 s 203 to terminate assignments to the claimant of the US copyrights in 37 songs, was held to be a derogation from the original licensing agreement.
    • Shipping; although the term itself is often not used, the doctrine that an individual term must not undermine a contract’s ‘main purpose’ is identical and the link was acknowledged by Rowlatt J in M Isaacs and Sons, Limited v William Mcallum and Company, Limited [1921] 3 K.B. 377
    • Franchising, eg Stone & Ashwell (t/a ‘Tyre 20’) v Fleet Mobile Tyres Limited [2006] EWCA Civ 1209.

Derogation from grant is an exception to the general rule expressed by Lord Neuberger in Arnold v Britton [2015] UKSC 36 that the ‘fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing  from the natural language’. The absence of a conflict is, perhaps, best illustrated by one of the most often cited re-statements of derogation from grant being found in Platt v London Underground [2001] 2 EGLR 121 (a judgment of Neuberger J, as he then was).

Remedies
Derogation from grant may give rise to a variety of remedies according to the particular circumstances.

    • An award of damages against the grantor, Platt v London Underground.
    • An injunction or declaration to prevent the grantor from exercising, what would be, but for the derogation, its legal rights, Gloucester Place Music Ltd v Le Bon.
    • The construction of contractual provisions so as not to undermine the main contractual purpose, William Hill (Southern) Ltd v Cabras (1986) 54 P. & C.R. 42.
    • The striking down of clear contractual terms to which the parties have agreed, Glynn v Margetson & Co [1893] A.C. 351
    • Providing a defence to an otherwise well-founded claim to enforce statutory or contractual rights brought by the grantor against either the other contracting party or even a stranger to the original contract (see below).

The most striking example of the flexibility and breadth of derogation from grant is British Leyland v Armstrong Patents [1986] AC 577, [1986] 1 All ER 850, a decision of the House of Lords falling into the last of those categories.

British Leyland brought a claim against the manufacturer of exhaust pipes, designed to fit Leyland cars. The House of Lords held that, although the copying had been indirect, it was infringement under the Copyright Act 1956. Despite this apparently well-founded claim, an injunction to assert the copyright and prevent the exhaust pipes’ manufacture was refused on the grounds that limiting car owners’ rights to repair their cars economically would be a derogation from the grant implicit in the sale of a motor car, and although a stranger to the contract of sale, the exhaust pipe manufacturer, nonetheless, had a defence by virtue of the implicit grant.

Armstrong’s effect is similar to that of Caparo Industries v Dickman [1990] 2 AC 605 (HL) in relation to the duty of care in tort, permitting the extension of derogation from grant to meet new situations, see per Lord Bridge at 627D:

‘… it seems to me within the capacity of the common law to adapt to changing social and economic conditions to counter the belated emergence of the car manufacturer’s attempt to monopolise the spare parts market in reliance on copyright in technical drawings by invoking the necessity to safeguard the position of the car owner.’

Overriding clear words in a contract
Glynn v Margetson, a shipping case, is the locus classicus: a contract in a Bill of Lading contained a deviation clause and the ship made an ostensibly permitted deviation, but the goods in question were perishable and ruined as a result. It was held that the deviation undermined the essential nature of the contract. Lord Halsbury said this: ‘Looking at the whole of the instrument, and seeing
what one must regard … as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract,’ (emphasis added).

Benefits matter
It is axiomatic that to be engaged, derogation from grant does not require a contract to be of no benefit to one party (total failure of consideration covers that eventuality). There will always be some benefit from contracts to which derogation from grant applies: the goods in Glynn v Margetson were physically shipped and delivered, the intending passengers in Anglo Continental Holidays v Typaldos [1967] 2 Lloyd’s Rep. 61 would still have had a cruise and the purchasers of Leyland motor cars in Armstrong may have had many miles of motoring before any need to repair arose. The test is whether there has been ‘substantial’, rather than total, deprivation (see Johnston & Sons Ltd v Holland at 267M).

Principles
Platt v London Underground Ltd concerned the lease of a kiosk by the entrance to an underground station. The kiosk should have enjoyed a steady flow of passing travellers but the entrance was closed for major works. Neuberger J held that this was a derogation from grant and awarded the lessee damages. As the case concerned actions by the landlord after the grant, not all the principles he set out are directly material to a derogation arising from terms of a lease but those applicable can be summarised as follows:

    1. A landlord cannot take away with one hand that which he has given with the other
    2. It is necessary to establish the nature and extent of the grant.
    3. The court should ask itself which obligations on the part of the grantor, if any, can be regarded as necessarily implicit, having regard to the particular purpose of the transaction.
    4. There is an overlap between the obligation not to derogate from grant, the covenant for quiet enjoyment, and a normal implied term.
    5. An express term should, if possible, be construed so as to be consistent with ‘the irreducible minimum’ implicit in the grant.
    6. Not only the terms of the lease, but the surrounding circumstances at the date of the grant as known to the parties have to be taken into account.
    7. The circumstances as they were at the date of the grant are very important.
    8. In assessing what the parties to a contract actually, or must have, contemplated, the court should focus on facts known to both parties and statements and communications between them; contract is concerned with communication as well as mutuality.

Cause & effect
Is there a derogation from grant as a result of an escalating ground rent clause? Nothing conclusively defines the irreducible minimum implicit in the grant of a long lease and the question will, inevitably, be fact-sensitive in any event. Material factors may include the following:

    • A long lease gives rise to a legal estate and is one of only two forms of tenure preserved as a legal interest after 1925; an Assured Shorthold Tenancy vulnerable to mandatory and discretionary grounds of possession is inherently less secure.
    • A long lease and an assured tenancy cannot co-exist, Richardson v Midland Heart Ltd [2008] L & T.R. 31; not only is relief against forfeiture inapplicable, because of ss 5, 8 & 45 of the Housing Act 1988 the mechanisms for termination are mutually exclusive; an assured tenancy can only be determined by the landlord by serving a s 8 notice: compare Richardson with the recent Court of Appeal decision in Golding v Martin [2019] EWCA Civ 446.
    • The duration of the lease—in many instances, terms of 999 years were sold.
    • Whether or not a property was marketed as ‘virtually freehold’.
    • The impact on value and marketability —even if technically marketable at the time of purchase through unawareness about escalator clauses, an actionable diminution in value would, prima facie, have occurred at the date the lease was entered into, Nykredit v Edward Erdman (No 2) [1997] 1 WLR 1627 (HL).
    • The amount of equity in the property.
    • Anything known to the developer/vendor at the time—one which had, say, had the onerous nature of the ground rent escalator drawn to its attention in 2007 (see Pt 1), might find itself in particular difficulties.

If an escalating ground rent and the consequences of the engagement of the Housing Act Trap were held to deprive a long leasehold of its essential quality and were thus a derogation from grant, a court would first be required to attempt to construe the term so as to be consistent with ‘the irreducible minimum implicit in the grant’. However, construing a clause which says ‘Pay £x’ or ‘Pay £f(x)’ (where f(x) is a formula increasing x over time) as anything other than what it says would be difficult (particularly post Arnold v Britton). Were the clause not capable of being ‘read down’, the only course would be to reject it in its entirety. The sewer could thus, potentially, afford a means of escape.

Apart from striking down offending clauses, were the argument perceived to have merit, it might put pressure on a government, which currently has set itself against retrospective legislation to aid existing leaseholders, to act to achieve a balance between the competing interests of leaseholders and freeholders by imposing a cap on escalating ground rents below the Housing Act limits, something which has just been recommended in the Report on Leasehold Reform by the Housing, Communities and Local Government Select Committee published on 18 March 2019.

Postscript
The report’s annexes include a letter dated 4 March 2019 to the chair, Clive Betts MP, referencing my evidence, in which David Jenkinson of Persimmon Group, says:

‘Mr Crozier, the barrister, raises the issue properties having rents above £250 pa (£1,000 in London) being subject to the forfeiture provisions more often associated with short-term assured tenancies. We would welcome this (presumably unintended) loophole being closed by legislation for long leases. Our documentation contains an agreement by the landlord that it is not entitled to rely on the non-payment of rent ground stated in the Housing Act 1988.’

This week a group of leading housebuilders issued a ‘pledge’, trumpeted by the government, to limit ground rent increases to RPI. Acknowledging the disapplication of relief against forfeiture was unintended may prove to be a useful concession but, as RPI-linked increases will still trigger the Housing Act Trap and the provisions applicable on the termination of assured shortholds and long leases remain mutually exclusive, the government and the housebuilders seem not to have grasped the problem. Perhaps the time has come to try derogation.

Copyright NLJ & Rawdon Crozier
Rawdon Crozier is a barrister & mediator practising from KBG Chambers (www.kbgchambers.co.uk).

Categories
Ground Rents

NOTES ON A SCANDAL: FREEHOLDERS & MEDIEVAL ROBBER BARONS – PART 2 OUT TODAY IN NEW LAW JOURNAL – PART 1 HERE TO READ.

Notes on a Scandal: Freeholders & Medieval Robber Barons is published today in New Law Journal

New Law Journal has many attractions for the legal author, not only is the turnaround for articles quick, publication can be within a couple of weeks, making it topical, but the quality of writing is high so one can bask in the reflected glory of being in the company of the other contributors in a respected legal journal. NJL is also very good with its copyright arrangements, which means that I can now reproduce in full Part 1 of Notes on a Scandal from the 8th March’s NLJ here now:

Comparisons were being made between freeholders and medieval robber barons (see, eg Hansard 18/7/2000 col 246) long before ‘The leasehold mis-selling scandal’, which, by some estimates, left over 100,000 homeowners stuck with leasehold properties they cannot sell, primarily as a result of escalating ground rent provisions (although there are widespread complaints about hidden charges and other onerous lease terms). Leaseholders feeling themselves thus afflicted, might well liken one particular side effect of escalating ground rent provisions — ‘The Housing Act trap’ — to being robbed by the baron and then flung into the dungeon sewer for good measure. However, as those familiar with films set in medieval castles know, the castle sewer can sometimes offer a means of escape.

This speculative two-part article considers whether, through the mechanism of derogation from grant, the sewer might do so in this case.

Perhaps the pithiest summation of derogation from grant is Lord Denning MR’s in Moulton Buildings Limited v City of Westminster [1975] 30 P & C R 182 at [186]:

‘If one man agrees to confer a particular benefit on another, he must not do anything which substantially deprives the other of the enjoyment of that benefit: because that would be to take away with one hand what is given with the other.’

It is sometimes mischaracterised as rule of construction, or as an implied term or covenant, but, while it may so manifest itself in particular cases, it is an independent rule of law that can give rise to a cause of action or even, as in British Leyland v Armstrong Patents [1986] AC 577, [1986] 1 All ER 850 afford a noncontracting party a defence to a claim brought by one of the contracting parties if the enforcement of that party’s strict legal rights would amount to a derogation from grant.

This introductory article explains how escalating ground rents give rise to the trap, which deems long leases assured, or assured shorthold tenancies, notwithstanding that they were sold at or about comparable prices to similar freeholds and, until the advertising watchdog put an end to the practice, were often marketed as ‘virtual freeholds’.

Escalating ground rent clauses
Historically, ground rents associated with long leases tended to be small and for a fixed amount, but from about 2007clauses with escalating ground rents were introduced by national housebuilders who
also increased the number and proportion of free-standing dwellings sold with long leases rather than as freeholds. Although there is one early newspaper report dating back to 2007 of a sharp-eyed buyer having picked up that the Taylor Wimpy ten-year-doubling ground rent starting at £300 a year would have reached £9,600 per annum by 2057, appreciation that there was a problem with escalating ground rents did not really break until midway through 2016.

At the 2016 Lease Conference, which was held in February, there was no talk of them; by the following February there was a clamour.

The Housing Act trap
One of the consequences of escalating ground rent clauses, described as ‘The Ground 8 trap’, was noted in the government’s consultation paper Tackling Unfair Practices in The Leasehold Market
(December 2017), at para 75: ‘The government is aware that, where ground rents exceed £250 per year or £1,000 per year in London, a leaseholder is classed as an assured tenant. This means, for even
small sums of arrears, leaseholders could be subject to a mandatory possession order if they were to default on payment of ground rent.’

‘The Ground 8 trap’ is something of a misnomer and ‘The Housing Act 1988 trap’ would be a more accurate description because The Ground 8 trap is only the most obvious consequence of a wider problem. The trap arises from interplay of s 1(1) and (2) and Sch 1 of the Housing Act 1988, which, respectively, define assured tenancies and list those tenancies which cannot be assured tenancies. Section 96 of the Housing Act 1996 then operates to make assured tenancies entered into on or after 28 February 1997 an assured shorthold tenancy unless it falls within one of the exceptions. Since the basic definition provides that any tenancy under which a dwelling is let as a separate dwelling ‘is for the purposes of this Act an assured tenancy’, a long lease could always theoretically have been caught, but the historically low levels of ground rent associated with long leases meant that most
did not exceed the £250 per year or £1,000 per year in London used to define ‘Tenancies at a low rent’ under Sch 1, para 3A. The idea that many long leases would be outside the exception was dismissed when the then Housing Bill was debated in the House of Lords—Hansard (Lords) 24 October 1988, Volume 500, Col 1461-2.

Ground 8
Ground 8 is one of the mandatory grounds for possession under the Housing Act 1988, Sch 2 and it applies when—at the date of the service of the notice under s 8 of the Act and at the date of the hearing:

    •  if rent is payable weekly or fortnightly, at least eight weeks’ rent is unpaid;
    •  if rent is payable monthly, at least two months’ rent is unpaid;
    •  if rent is payable quarterly, at least one quarter’s rent is more than three months in arrears; and
    •  if rent is payable yearly, at least three months’ rent is more than three months in arrears;

Its effect is not just that small amounts of arrears of ground rent can result in leaseholders being subject to a mandatory possession order if they default on payment but that there is no ability to
apply for relief from forfeiture. While it is right that the arrears must still be outstanding at the date of the hearing, not every defaulting leaseholder will be in a position to pay, notwithstanding that they may have considerable equity locked up in their leasehold property. That equity is lost when the possession order is made. Moreover it is not always the leaseholder who loses; a possession order determines the leasehold interest and any mortgagee loses their security as well—also without any possibility of rectifying the matter by applying for relief against forfeiture. With higher initial levels of ground rent and escalator clauses, a long lease can either be outside the tenancy at a low rent from
the outset or cease to be a tenancy at a low rent within a relatively short time thereafter.

Ground 8 is not the only trap
Ground 8 is not the only mandatory ground which could potentially apply to a long lease not at a low rent, the other mandatory grounds are:

    • Ground 7A, conviction for certain offences or antisocial behaviour;
    • Ground 7B, immigration status; and
    • Ground 6, if the lease gives the freeholder the right under certain circumstances to carry out work on the leasehold property.

Additionally, while a court may be unlikely to exercise its discretion under any of the discretionary Grounds 9 to 17 in Sch 2, that they may apply at least gives rise to a risk that a leaseholder may end up facing proceedings from an aggressive freeholder (it is not as if history suggests that aggressive
freeholders do not exist). Furthermore, the right of first refusal on a sale of the freehold for leaseholders of flats under the Landlord & Tenant Act 1987 is also ousted because that too has
a low rent test.

Might derogation from grant provide an escape?
Part 2 will consider the protean nature of derogation from grant, the remedies to which it gives rise and whether the effect of the Housing Act trap on a long lease is to take it below the irreducible minimum implicit in the grant so as to amount to a derogation.

First Published in New Law Journal 8th March 2019
© NLJ & Rawdon Crozier

Categories
Ground Rents

THE TENANT FEES ACT 2019: NO HELP FOR THOSE CAUGHT BY THE HOUSING ACT TRAP

Eight months before the much publicised Select Committee on Leasehold was launched on 24th July 2018,another enquiry had been launched on the 16th November 2017; the last evidence for that enquiry came in on the 26th February 2018 and the Committee’s report had been completed in March 2018. The product was a bill, which passed into law in June 2019 as the Tenant Fees Act 2019 and it is probably a wonderful bit of legislation, although, as ever, I shall hold fire and see how it works in practice before praising it too highly. It prohibits the charging of a lot of fees that landlords and managing agents currently charge and restricts the amounts which can be charged in relation to those fees which are permitted and provides a mechanism for varying leases so that terms do not conflict with the provisions of the Act.

While the Tenant Fees Act 2019 does not abolish leasehold, it might have provided remedies for much of what those saddled with burdensome modern long leaseholds find most problematic and as it applies to assured shorthold tenancies, it might have given a silver lining to the Housing Act Trap about which I have written quite a lot. But here is the rub; it is not retrospective and it excludes long leases. So it does none of those things for existing long leaseholders caught in the Housing Act Trap.

It is noteworthy that none of the evidence the Inquiry that lead to the Tenant Fees Act came from anyone affected by the leasehold mis-selling scandal but the Select Committee was the same and had the rolling behemoth of Parliamentary business checked, taken a breath and engaged in some joined-up thinking, it is possible that a much more worthy piece of legislation could have been produced. When the bill was debated, however, across four debates (two in the Commons and two in the Lords) only Maria Eagle raised the issue of long leaseholders and even then neither the long lease exception nor whether the provisions should apply to existing leases was discussed. Lord Shipley even seemed to think that long leaseholders were not afflicted by the same levels of charges and fees.

The Tenant Fees Act.

The key provisions are Sections 1 & 2; Section 1 provides:

(1) A landlord must not require a relevant person to make a prohibited payment to the landlord in connection with a tenancy of housing in England.
(2) A landlord must not require a relevant person to make a prohibited payment to a third party in connection with a tenancy of housing in England.

Section 2 makes similar provisions in relation to managing agents.

Under Section 28 “relevant person” has the meaning given by section 1(9) (and see subsection (2) of this section);

Section 1(9) defines a “relevant person” as
(a) a tenant, or
(b) subject to subsection (10), a person acting on behalf of, or who has guaranteed the payment of rent by, a tenant.

“tenancy” means—
(a) an assured shorthold tenancy other than—
(i) a tenancy of social housing, or
(ii) a tenancy which is a long lease,…

The definition of “tenant” is expressed as one of those irritatingly non-exclusive definitions, so beloved of legislators and, I suspect, pretty much no-one else, in any event
” ‘tenant’ includes—
(a) a person who proposes to be a tenant under a tenancy,
(b) a person who has ceased to be a tenant under a tenancy,
(c) a licensee under a licence to occupy housing,
(d) a person who proposes to be a licensee under a licence to occupy housing, and
(e) a person who has ceased to be a licensee under a licence to occupy housing;

Leasehold Reform, Housing and Urban Development Act 1993
Section 7.— Meaning of “long lease”.
(1) In this Chapter “long lease” means (subject to the following provisions of this section)—
(a) a lease granted for a term of years certain exceeding 21 years, whether or not it is (or may become) terminable before the end of that term by notice given by or to the tenant or by re-entry, forfeiture or otherwise;
(b) a lease for a term fixed by law under a grant with a covenant or obligation for perpetual renewal (other than a lease by sub-demise from one which is not a long lease) or a lease taking effect under section 149(6) of the Law of Property Act 1925 (leases terminable after a death or marriage or the formation of a civil partnership );
(c) a lease granted in pursuance of the right to buy conferred by Part V of the Housing Act 1985 or in pursuance of the right to acquire on rent to mortgage terms conferred by that Part of that Act;
(d) a shared ownership lease, whether granted in pursuance of that Part of that Act or otherwise, where the tenant’s total share is 100 per cent; or …

Categories
Ground Rents

STRIKING DOWN A RENT REVIEW CLAUSE

Since writing about derogation from grant as a possible remedy to the Leasehold Mis-selling Scandal, in particular in a two part article “Notes on a scandal: freeholders and medieval robber barons” in New Law Journal last year I have been asked whether there is a case of a rent review clause having been struck down for it and the answer is, in the case of a long lease, not so far as I am aware, but it has been used where an escalating rent clause has taken an assured tenancy out of statutory protection.

The case is Bankway Properties Ltd v Pensfold-Dunsford [2001] EWCA Civ 528 [2001] 1 W.L.R. 1369 in which a previous landlord had entered into what was expressed to be an assured tenancy under the Housing Act 1988 but it appeared that the landlord wanted the lease to qualify as an assured tenancy to obtain the tax benefits of the business expansion scheme.

The tenants were two individuals on housing benefit, who, being desperate to obtain accommodation, did not read the agreement very carefully and possibly not at all. The initial rent was £4,680 per annum. The tenants did not notice that there was a provision in the lease for the rent to increase to £25,000, a sum which there was no prospect of their paying and caused the tenancy to cease to be an assured tenancy because it was above the upper rent limit..

The landlord’s thinking seems to have been that possession could be recovered by increasing the rent and either relying on the existence of rent arrears, which he duly sought to do, or because the tenant would voluntarily surrender possession when asked for the increased rent.

The case was heard in the Court of Appeal by a two judge court consisting of Lady Justice Arden and Lord Justice Pill, who found for the tenants but their primary reasons for doing so was on different grounds.

Arden LJ relied on the principle that the provision allowing the rent to be increased to £25,000 was an improper attempt to evade the mandatory statutory scheme for security of tenure, while Pill LJ relied on the inconsistency between that provision and the intention of the parties to grant an assured tenancy as a matter of true construction of the agreement (see [58]).

Arden LJ commented at [42] that because there was no common intention to create a different obligation for the purpose of misleading the parties there was no sham in the sense used in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 (CA). Nor were the appellants misled or under a mistake.

However, as she explained at [43]:



“… there is a variant on the usual definition of sham where a question arises whether an agreement is not intended to have the effect stated but is intended to evade the operation of a statute out of which the parties cannot contract. This doctrine has been developed and applied by the courts not only in the context of the Rent Acts (see Antoniades v Villiers , above) but also in the context of agricultural tenancies ( Johnson v Moreton [1980] AC 37 and Gisburne v Burton [1989] 1 QB 391 ), the question whether a hire purchase agreement is in fact an unregistered bill of sale (see for example Re Watson (1890) 25 QB 27 ), the question whether a sale and repurchase agreement is an unregistered company charge (see for example Re George Inglefield Ltd [1933] Ch.1 ), the question whether an absolute conveyance is in fact a mortgage (see for example Re Duke of Marlborough [1894] 2Ch 133 ), the question whether a transaction is in substance an unauthorised reduction of share capital contrary to the Companies Acts (see for example Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 ) and the question whether a sum payable under a contract is a penalty (see for example Bridge v Campbell Discount [1962] AC 600 ). In these types of situations, as Lord Ackner put it in Antoniades v Villiers , above at 466, the question is: what was the substance and reality of the transaction entered into by the parties? The Court is not bound by the language which the parties have used. It may for instance conclude, when it examines the substance of the transaction, that what the parties have in their agreement called a sale and repurchase of book debts is in truth a registerable charge over them.


44. For this purpose, the court can look at all the relevant circumstances, including the subsequent conduct of the parties (see per Lord Jauncey in Antoniades v Villiers , above, at 475). There does not have to be a common intention to enter into other obligations or to deceive a third party: in Antoniades v Villiers for instance, the “licensees” acknowledged in writing that their agreements with the landlord did not have the protection of the Rent Acts (see Antoniades v Villiers , above, at 457-8). Lord Templeman points out in Antoniades v Villiers that the earlier case of Street v Mountford , above, had established that “where the language of licence contradicts the reality of the lease, the facts must prevail. The facts must prevail over language in order that parties may not contract out of the Rent Acts” (at 463). Or, as Lord Esher MR put it in Re Watson , above, “the Court ought never to let a sham document, drawn up for the purpose of evading an Act of Parliament prevent it from getting at the real truth of the matter”.“



Arden LJ went on to consider the relevant provisions of the Housing Act 1988 and concluded at [49] that they did not permit parties to an assured tenancy to agree to vary the statutory scheme for security of tenure so as to reduce the level of protection available to the tenant.

The provision allowing the rent to be increased to £25,000 was not in substance or reality a provision for the fixing of rent (the landlord never expected to receive rent of that amount), and was instead a provision to enable the landlord to recover possession otherwise than in accordance with the mandatory scheme, and amounted to an unenforceable contracting out ([51] and [54]).

It was a device masquerading as a provision for increase in rent, the sum not being rent at all on a true analysis ([55] and [56]).

Pill LJ, on the other hand, expressed having some difficulty with the concept of unlawful contracting out from the legislation, and based his decision on an analysis of the contract, which made it clear that an assured tenancy was intended. The statutory purpose of the assured tenancy was to give long-term security ([66]).

The clause providing for the rent increase was “inconsistent with the statutory purpose which it was the main object of the agreement to achieve” ([67]) and had to be ignored.

Arden LJ endorsed this approach at [58] saying:

 

“… Pill LJ reaches the same conclusion as myself on the basis of the inconsistency between clause 8(b)(iii) and the intention of the parties to grant an assured tenancy as a matter of the true construction of the agreement: see Glynn v Margetson & Co [1893] AC 351 . The citations from the speeches of Lord Bridge and Lord Templeman set out above show that inconsistency, or repugnancy, and pretence are alternative bases for their decision in Antoniades v Villiers [1990] 1 AC 417 , and I accept that inconsistency is relevant and applicable in this case too.“


Glynn v Margetson is one of those shipping cases in which the term ‘derogation from grant’ is not used but the doctrine that an individual term must not undermine a contract’s ‘main purpose’ is identical and the link was acknowledged by Rowlatt J in M Isaacs and Sons, Limited v William Mcallum and Company, Limited [1921] 3 K.B. 377.

Is there a case of a rent review clause having been struck down for derogating from grant? The answer is “Yes”.