UK: The Trouble With Leases...

Last Updated: 25 February 2008
Article by Neil Jamieson and Tom White

Originally published in BLG Lawyers' Liability Briefing: Issue 22.

A number of recent surveys have found that around 45 per cent of claims against solicitors arise out of property work. These claims come not only from traditional residential conveyancing work: up to 15 per cent relate to commercial property and landlord and tenant problems.

The current climate

Speculation over recent months about the weakening state of many parts of the property market is now turning into a reality. Nobody can be sure whether we are heading towards a property crash to match that of the early 1990s, but a combination of soaring property prices in recent years and the credit crunch is a major worry, not just to property owners but also to solicitors and their insurers, because historically property claims burgeon in a falling market. When the market goes into reverse, bad deals cannot be disguised by an inexorable rise in property values. Instead, clients can be found scrutinising defaulting and underperforming investments to see whether their professionals can be made to share the pain.

One particular area where we can expect to see increasing activity is claims arising out of leasehold interests. To take a simple example, a failure to serve an effective break notice in a rising market may make very little difference: the landlord is likely to be happy to take the property back because it is easily re-lettable. In a falling market, however, the lease may be impossible to dispose of and may become a millstone which the tenant cannot get rid of unless it agrees to pay a large reverse premium. Losses will also be magnified when the ebbing tide of rental values leaves an over-rented property above the water-line not just at the next rent review but also the one after that.

The most common problem areas in relation to leases are still the usual suspects: missed time limits under the Landlord & Tenant Act 1954, where recent changes in the rules have done nothing to stem the flow of claims; break clauses (more missed deadlines and, commonly, a lack of advice on the effect of a conditional option); and rent reviews, where drafting errors often lie unnoticed for many years until the rent review comes around. Whilst they may be a familiar story, they still cost the professionals concerned and their insurers millions of pounds, and the value of the claim can often far outstrip the fees earned - this is an area in which work done for £500 (or less) regularly results in claims for £500,000 (or more).

The recent case of Funnell and another v Adams & Remer (2007) is a typical example. The defendants were solicitors who acted for the claimant tenants, who were tree surgeons and landscape gardeners, in the drafting of a lease. As a result of "significant failings" by the defendants, the lease was drafted to impose an obligation on the tenants to carry out certain works, whereas the tenants' intention was that they should be permitted (not obliged) to carry out the works. A further problem for the tenants was that under the rent review clause the works would be rentalised at the next review. So, not only were the tenants required to carry out the improvements at their own expense but they also had to pay extra rent in respect of them. They would therefore have had to pay twice over. The solicitors were held liable for negligently failing to advise the tenants on the effect of the lease.

The court rejected the defendants' arguments on causation, concluding that the reasonable steps taken by the claimants to extricate themselves from the predicament they found themselves in did not break the chain of causation.

Earl of Malmesbury v Strutt & Parker (2007) is another recent case in which the rent payable under a lease was the source of the dispute. This time, surveyors rather than solicitors took the hit - the solicitors escaped liability on the basis that they were not obliged to give commercial advice (this being under the surveyor's remit), but it is not difficult to envisage solicitors being found negligent in similar circumstances. The claimant alleged that he should have been advised to include a rent based on turnover in the leases he granted over land to be used for car parking at Bournemouth airport. It was said that if a turnover rent had been agreed the claimant would have generated a substantially higher rental income from his land than he in fact did. The surveyors were found negligent for not asking for a turnover rent and for failing to take into account changes in the commercial background.

Another growth area is claims under the leasehold enfranchisement legislation. The scope of the Leasehold Reform, Housing and Urban Development Act 1993 has been extended and is fraught with time limits and conditions which, if overlooked, can result in difficult claims involving complicated valuation issues.

Can you handle it?

Although it can often be difficult to contest liability in property-related claims (a missed time limit is a missed time limit and strict liability generally applies to drafting errors - breach of duty was admitted in Adams & Remer for example) it is not all doom and gloom. There are typically a number of ways and means of keeping the value of these claims down to size or even of defeating them altogether on causation grounds. A checklist of possibilities is shown below.

The court in Remer, whilst finding against the defendants on causation, was at pains to point out that the claimants were still required to show that the course of action they took was a reasonably foreseeable consequence of the defendant's negligence, and that they would not have taken this course, and suffered the loss claimed, absent the negligence. These are two substantial hurdles that claimants and their solicitors often overlook.

The Strutt & Parker case is a perfect example of a claimant overvaluing a claim. The original claim was for in excess of £100m based on 80 per cent of the car park's turnover. Although the court gave a further judgment on quantum in December 2007, the final figures have still to be worked out by the experts. However, already the court has reduced the turnover percentage to just 10 per cent so the final figure will be far lower than the amount claimed.

Tools for defending property-related claims

  • Are there arguments as to the scope of the solicitor's duty? See Stone Heritage Developments Ltd v Davis Blank Furniss (2007) covered in "Footnotes".
  • Is rectification available? See KPMG LLP v Network Rail Infrastructure Ltd (2006).
  • Causation arguments - consider the facts.
  • Do loss of chance principles apply?
  • Analyse the method of calculation and credibility of the alleged loss.
  • Has the claimant failed to mitigate?
  • Has there been contributory negligence?
  • Is there a claim for contribution against another professional?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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