Current leasehold concerns

Many will be aware that following the initial changes to the Nationwide Building Society’s mortgage instructions, the Government is now looking at ways of controlling or regulating the grant of Leases for houses.  Indeed, it has gone so far as to suggest that the sale of new house as leaseholds should be prohibited.  It is therefore a case of now “wait and see”. 

However, the Nationwide Building Society have made it clear that they will be looking very carefully at mortgage applications to be secured on long Leasehold Titles where the ground rent can be increased at high frequency intervals.  This will ultimately have an affect on the Leasehold Title acquisitions and it will be interesting to see if other major lenders follow the Nationwide Building Society’s example. 

What is the reason for this current change of policy?
Undoubtedly it is because unscrupulous landlords have seen the ability to collect higher rental increases as an attractive proposition.  It could also be suggested that the recent changes over the last few years by developer landlords stipulating that ground rents are to be increased or doubled at regular intervals, as making the freehold a more attractive proposition when they come to sell them.  As a result, this now can affect the affordability by borrowers who can suddenly find that their ground rent has been doubled thus placing severe pressure on their repayment ability.  Although this is really a question of affordability by the Borrower at the time of application for the mortgage, it will be deemed prudent for property professionals to remember that these issues can affect the borrower’s chances of obtaining a mortgage.  

Lease Forfeiture

A little known provision under present legislation is beginning to cause more careful consideration.  Under present legislation, Leases contain certain provisions under which a Lease may be terminated by the landlord, which will result in the Leaseholder and their Mortgagee being left without any security.  This relates to the amount of ground rent payable under a Lease.  Under the Housing Act 1988 if a ground rent exceeds £250 per annum outside Greater London or £1,000 per annum within Greater London the Lease becomes an Assured Tenancy.  This application of the Housing Act is not widely known and therefore mainly goes unreported to Lenders.  If the ground rent rises above £250 per annum it will result in properties occupied by owner occupiers becoming an Assured Shorthold Tenancy.  The worry here is that it provides landlords further grounds for possession based on non payments of rent.  Lessees cannot use the excuse that ground rent has not been demanded as the obligation is for the Lessee to pay ground rent whether “demanded or not”.  If the Lessee misses a ground rent payment then under the above provisions the landlord could apply for possession of the property.  The response would be for the Lessee or the Lessee’s Mortgagee to pay the ground rent thus negating the breach, but this has yet to be tested through the Courts.  Fortunately for the Lender, they do have the right to claim relief from forfeiture should the Borrower break the terms of the Lease.  But again, this has yet to be tested under the above provisions. 

This is something that property professionals should continue to monitor.

Are you aware that the Council of Mortgage Lenders has rebranded itself and is now known as “UK Finance”.

If you have a client who needs any advice on the above, please contact one of the Residential team on 01206 217300.