As lenders will be aware – and as recently discussed at Ascent’s Round Table on Non-Standard Litigation - there may be up to one million defective leasehold interests - both flats and houses - in England and Wales. The defective provisions in leases relating to ground rents were particularly prevalent in leasehold houses but also in off plan developments including notably in the expensive Battersea area of London.

The common defective provision allowed for ground rents to multiply to the extent that on some leases the ground rent might be as high as £60,000 or even more after 60 years.

Is this a problem for residential lenders?

It is undoubtedly a problem. There may well come a point when leaseholders cease paying their ground rent and the leasehold interest become liable for forfeiture. It is likely that when this occurs the six year time period for making a claim under either Section 2 of the Limitation Act 1980 relating to negligence and Section 5 of the Limitation Act 1980 relating to breach of contract will have passed.

A lender might wish to rely on Section 14a of the Latent Damages Act (1986) and argue that the lender has only become aware of the facts which might lead it to investigate a claim within the last three years. However the Latent Damages Act (1986) is subject to a longstop provision of 15 years and some of these defective leases may be coming up to their fifteenth year anniversary. Furthermore, we can envisage that there may well be considerably difficulties in making a viable claim under Section 14a Latent Damages Act (1986) for the following reasons:

1.  Insurers are bound to argue that the general knowledge that leasehold houses and off plan properties had defective leases has been available to lenders for more than three years.
2.  Some of the firms who have undertaken these conveyancing transactions may no longer be in existence, and any run-off insurance may well now have expired.
3.  There are proposals for the reduction of primary insurance liability from £2m to £0.5m.

We would be willing to offer an audit of your leasehold interest in relation to off plan developments or leasehold houses to ascertain as to whether a problem should be considered and action undertaken. This will involve of course both a claim against the original solicitor and also no doubt negotiations for a variation of the lease with the developer or its assignee.

 Cladding

The ramifications of the Grenfell fire are likely to be substantial in respect of lending on leasehold blocks of flats.

It is likely that the freeholders will now be entering into contracts with builders for the removal of the existing cladding and the re-cladding of the premises with more expensive material.

It is likely that under a substantial amount of leases that the full costs of the re-cladding will be sought from the leaseholders under the service charge provisions. For some of the leaseholders this may simply be prohibitively expensive. It may well be that lenders need to assist in challenging their freeholders prohibitive service charge payments. Again, this is an issue, which we can consider further with lenders.

For further information or to discuss any aspect of the legal summary above, please contact Jonathan Sachs at jonathan.sachs@irwinmitchell.com or on 0207 421 3977