Say ‘No’ to leasehold property more readily to help your client
It goes against the grain to advise a client not to proceed with a property transaction, especially when the client has his or her heart set on purchasing the property.
However, as a responsible legal advisor we need to less afraid of saying ‘No’.
Leasehold property is attracting a lot of negative press of late, and is the focus, as we know, of Government attention . The temptation is to look at this as yet another ‘scare story, and one which, in time, will blow over. The reality is it is unlikely it will, and if anything, it is likely to get worse before we will see any improvement. It’s therefore dangerous, and potentially negligent, for conveyancers to stick their head in the sand and ignore the many warning signs appearing on a daily basis.
Doubling rent review clauses and provision for rent increase at regular issues are presenting a major hurdle for those who are looking not only to buy, but also sell, leasehold properties. It was only yesterday that an estate agent called to enquire why we were advising a client to withdraw from a transaction when the agent was aware other properties in the same development had recently sold.
It is now recognised that it will be more difficult to sell a leasehold property which has a doubling ground-rent charge that rises after 10 years. This doubling of ground rent may have an impact on the marketability and mortgageability of the lease when selling or buying with such a clause. Some lenders may not agree to offer a mortgage on a property with a doubling ground rent. Nationwide has formally started declining mortgage offers which include a doubling ground rent clause.
At present its a lottery as to whether a lender faced with one of these clauses with be prepared to lend. In the light of this, and the ever-changing lender landscape, would it be sound advice to allow a client to purchase a property subject to a lease with one of these clauses? I would submit it would not, unless the lease could first be varied to remove the offending clause. Some conveyancers looking to avoid the delay and cost of seeking a lease variation, advise clients to take out indemnity insurance. I am not sure I agree with this because insurance only acts as a sticking plaster, and not as a cure. Furthermore, even if the lender is happy to accept insurance there is no guarantee that other lenders will be minded to accept the policy when it comes to sell/remortgage. Moreover, lender policy seems to be changing these days quicker than the wind.
There is also a danger of some conveyancers becoming too fixated on what the client’s lender is saying about the clause and ignoring in the process the best interests of the lay client. It is unsafe to assume that just because the lender is happy to proceed, that the client will also be content to continue. The client needs to be made aware of the dangers of purchasing a property with one of these causes in the lease, and in my mind advised not to proceed with the transaction.
If the client disagrees then a letter setting out your advice should be sent, and the client should be asked to confirm instructions in writing notwithstanding the advice.
The client should be warned along that this type of rent review clause may:
- be costly to the client as the rent increase (although as it gets more expensive this won’t be during the client’s life time);
- stop a future buyer from getting a mortgage as mortgage lenders do not like doubling ground rent clauses (it might even prevent the client from re-mortgaging);
- cause an issue on sale as the buyer doesn’t want to buy a property with ground rent that doubles; or
- reduce the property’s value (the ground rent liability makes the property less valuable).
This represents a serious issue for conveyancers, and until Government makes these clauses illegal, conveyancers should be saying ‘No’ more often than I fear is happening at present.
David Pett – Solicitor