Leasehold titles remain a frequent source of difficulty in property transactions, and it is often only once a seller accepts an offer that issues with the lease become apparent. Many of these problems arise because the lease does not meet the requirements set out in the UK Finance Mortgage Lenders’ Handbook (the rulebook lenders use when deciding whether a property or lease is acceptable security for the loan). When defects are discovered late in the process, the result is often delay, increased legal fees for both parties, and in some cases the need for a Deed of Variation is required to satisfy lender requirements.
Outstanding Term:
Most mortgage lenders require a minimum unexpired lease term to ensure the property remains marketable throughout the mortgage term, and while requirements vary, many expect at least 85-90 years remaining at completion to avoid future marketability issues. Where a shorter term is identified, a lease extension may be necessary. This can be done through a statutory process (a legal right available after two years of ownership) or informally by direct negotiation with the Landlord. Sellers are advised to check the remaining term prior to marketing the property to ensure that you do not encounter any issues with obtaining offers.
Landlords typically require the seller to pay their legal and valuation fees for a lease extension, and the premium itself can be substantial, so early budgeting is essential. Although sellers are generally encouraged to extend the lease before marketing the property, this is not always possible for example, where the seller has recently inherited the property and does not yet qualify for the statutory right to extend. Buyers should therefore also be alert to short leases and factor possible extension costs into their plans.
Mortgagee Protection Clauses
Mortgagee Protection Clauses (MPCs) are designed to protect the lender’s security by ensuring the landlord cannot:
- vary or surrender the lease without lender consent,
- forfeit the lease without first serving written notice on the lender (typically giving at least 28 days), or
- prevent the lender from remedying breaches or arrears.
While an MPC is not a statutory requirement, most mainstream lenders expect these protections. the lease to include provisions that:
- protect the lender’s security in the event of forfeiture
- ensure the lender receives notice of arrears or breaches
- allow the lender to remedy breaches
- prevent the Landlord from terminating the lease without giving the lender an opportunity to intervene
Where a lease is silent on these protections, a lender may insist on a Deed of Variation before lending. Because these issues usually only come to light once solicitors review the lease, both parties should be prepared for possible additional costs and delays.
Ground Rent Escalation Clauses:
Many leases contain ground rent escalation clauses, often increasing the rent at fixed intervals. The difficulty arises where the rent increases steeply—particularly “doubling” rent clauses. it. For instance, a rent of £250 doubling every 10 years becomes £64,000 after 80 years, a level that is clearly unaffordable and out of step with inflation. From a lending perspective, rapidly escalating ground rent creates a risk of arrears, which in turn threatens the lender’s security.
A further concern is that under Schedule 1 of the Housing Act 1988, if the ground rent under a long lease exceeds:
- £250 per year, or
- £1,000 per year in Greater London,
then (if it is the leaseholder’s only or principal home) the lease can be treated as an Assured Shorthold Tenancy (AST). An AST exposes the leaseholder to mandatory possession proceedings for rent arrears – an unacceptable risk for lenders. As a result, many will refuse to lend unless the lease is varied to cap or remove the escalation.
Although the Leasehold Reform (Ground Rent) Act 2022 restricts ground rent on new long leases to a peppercorn, this does not assist older leases granted before the legislation came into force.
Deed of Variation:
A Deed of Variation is used to amend the terms of an existing lease. Where a buyer discovers that a lease does not meet modern lending requirements, negotiations with the Landlord may be necessary to agree appropriate amendments. As mentioned, Landlord’s often require their legal costs to be covered by the party requesting the variation. If the Landlord refuses to enter into a Deed of Variation, the transaction may be unable to proceed. Sellers are therefore strongly advised to review their lease in advance of marketing to avoid unexpected delays or the risk of losing a buyer.
If you are in the process of selling your leasehold property, it would be prudent to review the terms of the lease to ensure that there are no issues which may prevent or delay a sale.
Should you wish for further advice regarding the terms of your lease or the standard lender requirements, please contact our Residential Property team today by emailing info@bussmurton.co.uk or by calling 01892 510 222 for further information.
For bespoke advice on this or any other area of law, get in touch with the team now.
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