SRA issues guidance for solicitors advising on leasehold property

Conveyancing continues to be the area of practice that generates the most claims activity for insurers of solicitors’ PII. This includes claims arising from poor or inadequate advice in relation to leasehold property.

In January 2022 the SRA published a Guidance Note for solicitors advising clients on the purchase of leasehold property. It is available here. We recommend that this note is put on the “must read” list for all your fee earners who are engaged in conveyancing work.

Escalating ground rent clauses are one of the main topics of discussion in the note. They have been a significant issue in recent years following some developers selling houses on a leasehold basis with onerous ground rent clauses, whereas such properties are ordinarily sold on a freehold basis. This has also drawn attention to onerous ground rent clauses for some residential flats which are typically on a leasehold basis.

The note starts with a reminder of the obligations under the SRA Principles and the Codes for firms and solicitors. It also highlights some practical issues relating to:

1. providing competent advice,
2. referrals and conflicts of interest; and
3. enforcement.

Providing competent advice

The SRA stress the importance of ensuring that clients are clearly advised that they are purchasing a leasehold interest and “that they understand the implications of this and any material clauses.”

When discussing the obligation to ensure that escalating ground rent clauses are clearly understood the note advises:

Be aware that is the sort of clear statement that claimant solicitors are likely to seize upon when acting for a client who is bringing a PII claim alleging that they were not properly advised regarding the details of a leasehold property they were buying and have suffered loss as a result. Being able to evidence that you gave clear and comprehensive advice will always be important when defending such a claim.

The note also highlights the importance of advising clients of additional risks, such as any potential for the lease to be treated as an assured shorthold tenancy under the Housing Act 1988, by virtue of exceeding 0.1% of the property value. Where this occurs, it will of course change the nature of the relationship between the client and the freeholder, which could put the client at risk if rent falls into arrears.

Referrals and conflicts of interest

The SRA’s discussion regarding referrals and conflicts of interest has clearly been prompted by a concern about the potential risk to clients where there is a close relationship between a solicitor or law firm and a developer.  A common example is a law firm being on a developer’s “recommended” list for purchasers to use.

This scenario can potentially give rise to a conflict of interest and it is important to ensure that law firms in this situation do not allow their own business interests to cloud their responsibility to act with independence, and in the best interests of their client who is purchasing the property.

For example, the note reminds us that clients cannot be required to use a specific firm and if it becomes apparent they were told that they were obliged to do so, then the SRA expects firms to “raise the issue with the developer and to advise the client that there is no restriction and that they are free to instruct legal advisors of their own choosing.”

Enforcement

The SRA advise that they would not generally penalise a solicitor where there has been an isolated incidence of poor practice, unless the case demonstrates behaviour falling well below the standards they require, such as an individual knowingly acting outside their competence.

However, the SRA does warn that they will focus on cases where there is evidence of “seriously or persistently poor levels of competence demonstrating a pattern of behaviour”. An example they give is an overly mechanical “copy-and-paste” approach to advising clients.

The SRA also warn that they may have regard to the contents of the Guidance Note when exercising their regulatory functions….so we encourage you to make sure everyone in your firm who is engaged in conveyancing work has read it.