Six law firms are facing disciplinary action by the Solicitors Regulation Authority (SRA) for their involvement in the recent leasehold debacle.
In its 72-page report Residential conveyancing thematic report out in April, the regulator found almost a quarter of conveyance firms had failed to properly explain the term ‘leasehold’ to homebuyers, as they assumed their clients already knew the difference between that and freehold.
The review, conducted in 2018, included a sample of 40 law firms who offer residential conveyancing services and a detailed review of 80 case files.
It led to six law firms being referred to the regulator’s internal disciplinary process for a number of failings including anti-money laundering issues, due diligence and fee transparency.
In recent years an increasing number of new build properties have been sold on a leasehold basis, with unsuspecting buyers subsequently being caught out by clauses which led to large bills and a rise in ground rent.
In many cases, the developers then sold the freehold on to third parties without the knowledge of the homeowner.
According to the SRA, more than 100,000 people have been affected and are unable to sell their homes as a result.
The review found while all firms gave clients quotes before agreeing to work with them, in one third of cases (34 per cent) they failed to include fees for additional work, which should have been anticipated at the outset.
The missing fees related to processing bank transfers, accessing online portals, mortgage administration fees, electronic ID checks or administering gifted deposits.
The SRA alleged this could indicate some firms were providing unrealistic initial quotes in order to win business.
The SRA also found 37 per cent of firms failed to be transparent about the management fees they added to the fee a bank charged for making a money transfer. In some cases, this led to clients being charged as much as 10 times the fee set by the bank.
The legal watchdog warned the conveyance firms could have breached their duty to act in the best interests of the clients and could be subject to future professional negligence claims.
Anna Bradley, chairwoman of the SRA, said it was disappointing to see examples of poor practice in conveyancing.
She said: "People should be able to rely on their solicitors to be open about what their services will cost, and to explain the potential financial and legal implications of any transaction.
"When solicitors fail to do this, for example in relation to long term leasehold charges, they may be leaving their clients open to ever increasing and potentially unaffordable financial liabilities.
"We will now be looking closely at how firms are publishing their pricing for conveyancing through our programme of monitoring firms’ websites.
"We have already published information for the public on the issue of leaseholds and we will be sharing this report with the government as it considers leasehold reform."
The government last month (March 28) launched a voluntary pledge to tackle the treatment of leaseholders in the property industry, including those trapped in "unfair and costly" deals.
It also announced plans to close the "legal loopholes" which mean leaseholders who challenge high fees and hikes in service charges in court risk paying a landlord's legal fees, a rule which applies even if the court rules in the leaseholder's favour.
The government intends to consult the industry on whether these changes should also apply to existing leases.
Greg Cunnington, director of lender relationships and new homes at Alexander Hall, said: "There is no doubt that when purchasing a leasehold a client should always be fully aware of what this means and all terms, in particular for the ground rent and service charge."
He said a leasehold in itself should not be viewed as a negative, as the majority of flats need to be set up this way but he added the terms needed to be fair and transparent.
He said: "It is absolutely vital that any properties with onerous ground rent escalations are looked at and revised as they are causing some people to be trapped with no sale possible as any potential buyer either cannot secure a mortgage or is put off and that is a completely unfair scenario."
Martin Bamford, chartered financial planner at Informed Choice, added: "Homebuyers rely on professional legal advice to spot the pitfalls and risks.
"The difference between a freehold and leasehold property is very basic, but we should never as professional advisers assume that our clients have all of the knowledge they might need.
"It never hurts to go back to basics and explain these principles, before confirming understanding of the implications. Assuming client knowledge is a very dangerous game."
