INTRODUCTION
I am so sorry to go on about long leases yet again – I am sure we are all sick to the teeth with them – but what does not seem to have received much publicity is the publication by the Council of Mortgage Lenders (now UK Finance) of ‘information’ for those acting for mortgage lenders. These need studying carefully so we can fulfil our obligations to our lender clients. Extensive extracts follow with the writer’s comments inserted at the appropriate point:
New Build Leasehold Properties
Background
…This document is for information only. It does not form part of, or override any CML member’s lending policies or guidance to their professional advisers such as valuers or conveyancers. Nor does it take precedence over relevant clauses of the CML Lenders’ Handbook, such as s 5.14.1 and 5.14.9.
Overarching considerations for lenders
Affordability
… It is a regulatory requirement for lenders to take account of all known future changes to a borrower’s income and expenditure that could affect the affordability of their mortgage. As such, understanding the level of ground rents, how they increase over the mortgage term and other known charges due under a leasehold agreement, are relevant to lenders’ assessments of affordability…
Property value and saleability
If ground rents and other charges appear to have an impact on the value and saleability of the property, lenders may, together with other matters, take this into consideration in deciding whether, and how much, to lend. Lenders will rely on the advice of professional advisers, particularly the mortgage valuer, here.
Comment: This is clearly a valuation issue, but when the valuer looks at the property he/she will not have had sight of the lease. If in doubt, and certainly in the case of the regular doubling of the rent, the amount of ground rent etc must be reported to the lender as a valuation issue so that the valuer can then be asked to make an informed decision.
The length of the lease term also has relevance to the value of the property, as at a certain point, it may be necessary to negotiate and pay for an extension of the lease to preserve the property’s value for the future.
General points
Given that lenders must consider both affordability of the borrower, and the sustainability of the value of the property, lease terms which involve obligations for future payment, such as ground rents, are more likely to be considered acceptable for lending purposes if they are set at levels that will not materially change mortgage affordability in the future, or impact on the value of the property; and that the lease length is suitably long (i.e. is granted for hundreds, rather than tens of years).
Comment: Does this mean the end for 99 year leases – or indeed 125 year lease? Should all such leases be reported if the term is not stated in the mortgage instructions?
- Lenders may query why a property is offered as leasehold. This is particularly so for leasehold houses.
Comment: Is a lease ever necessary for a house? A lease could be said to be appropriate where it is necessary to make positive covenants bind successors –e.g. in the case of the need to maintain an environmental strip. But other methods are available if the freehold is sold – eg a Restriction on the Register to ensure every buyer enters into a direct covenant.
New build leasehold properties
- In relation to ground rents, lenders would expect to see nominal ground rents, reflecting the origins of the ground rent being ‘peppercorn’ in nature.
Comment: ‘expect to see’ – presumably then we should report all leases which don’t have a peppercorn rent!
- Under current leasehold legislation, there are certain provisions which present a risk that the lease may be terminated or forfeited by the landlord (freeholder), leaving the property owner without a leasehold interest, and the lender mortgagee without a security. Therefore, lenders will expect that a conveyancer acting on their behalf advises on such risks and how they might be mitigated. An example is the relevant provisions of the Housing Act 1988 in relation to the creation of an Assured Tenancy where the ground rent exceeds £250 per annum or £1000 in Greater London.
Comment: All long leases contain a forfeiture clause. Are we now to report this to lenders? Fortunately, this is mitigated by the lender having a right to claim relief from forfeiture should the borrower break the terms of the lease.
The impact of the 1988 Act is very controversial. If the rent is, or will rise to, more than £250 per year, this will result in the long lease becoming an assured shorthold tenancy. This gives the landlord grounds for possession based on non-payment of rent, but with no protection for mortgage lenders who would then lose their security. It seems that this situation must now always be reported. It is difficult to see how, short of legislation, this issue can be mitigated against. Any suggestions gratefully received!
Specific considerations
Lenders will expect professional advisers such as conveyancers and valuers to consider:
- The length of the initial lease term granted. As a general principle, longer lease terms will help sustain the property’s value for longer, as there should not be a need to seek an extension of the lease in the medium term (i.e. over the term of the mortgage). Lenders using the CML Lenders’ Handbook already stipulate a minimum lease residue requirement (see s 5.14.1 of the CML Lenders’ Handbook)…
- The ground rent review formula (if not a fixed figure). Professional advisers should take into consideration:
o The CML Lenders’ Handbook at s 5.14.9, which provides that lenders will accept a periodic increase in ground rent, provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable.
o Where the formula is one which uses increases in line with an index, whether the index is a recognised UK index and is appropriate and/or acceptable to them. Some lenders may also expect a cap on the maximum ground rent amount, to guard against the ground rent reaching an unreasonably high sum, which could impact on the property’s value, the continued affordability of the mortgage and the future saleability of the property.
o Some lenders may be concerned to see the use of compounding formulas, or the use of minimum increases, in conjunction with an index-linked formula.
o Where the formula does not link with a recognised index, and instead uses a multiplier (e.g. doubles) at set intervals, the frequency of the rent review intervals. There is no single industry view on a minimum acceptable frequency, as it may depend on other factors such as the initial amount of the ground rent, and whether there is a cap on the number of times the rent is reviewed.
- Other fees charged under the lease
o Where other fees are charged under the lease (for example, on a transfer of equity) lenders will expect that these are set at reasonable levels. Where the fees follow the ground rent formula (for example, if they are set at 50% of the prevailing ground rent), lenders will have similar expectations as set out above for ground rent formulas.
Conclusion
A lot for conveyancers (and valuers!) to think about here. It seems that conveyancers are already facing compensation claims from ‘ambulance chasers’. Certainly, in future we must warn both buyer and lender clients much more fully about the implications of leasehold ownership and the problems that might occur. More work, no more money, no thanks – the conveyancer’s lot is not a happy one.
