Not all borrowers will be able to service their mortgages and lenders will occasionally have to take possession of the mortgaged property in order to sell it and clear the debt.
When the advance was made the lenders will have confirmed the then current market value, and the necessary legal checks will hopefully have been made to confirm that the property title is acceptable for lending purposes. So far so good. MFG readers will all be very familiar with all this.
Selling repossessed properties should be straightforward and it normally is when the security is freehold. However when the property has a leasehold title life gets a bit more complicated.
Additional costs
The owner of a leasehold house or flat who has been unable to pay the mortgage will probably have failed to pay the ground rent and service charges.
So a mortgage lender will have to clear the ground rent and service charge debt, perhaps going back some years, before having a saleable title.
Then a reading of the lease may uncover onerous and unexpected lease covenants which adversely affect the resale value. In an extreme case the lease may be unsaleable until costly legal rectification is completed.
The surveyor providing the original valuation will, typically, not have read the lease so the valuation will be made on the assumption that the lease terms are all normal and acceptable. The conveyancer scrutinising the lease on behalf of the mortgage lender when the loan was made could have missed onerous lease terms or failed to advise the lender regarding their significance.
Leasehold scandal
Leasehold has been in the news recently with leaseholders complaining that they were misled into buying leasehold properties with excessive and increasing ground rents.
The quality of the management of blocks of flats undertaken by freeholders has been poor with many blocks gaining a bad reputation. This has serious implications for resale values and mortgage lender’s security.
On top of all this we have had Grenfell and the issue of inflammable cladding on many modern blocks of flats which has cast a spotlight on the, often unsatisfactory, freeholder/leaseholder relations.
Pressure has been building in Parliament and elsewhere for something to be done about the leasehold system however progress has been slow and there has been much legislative tinkering with the leasehold system over the years going right back to the original leasehold reform legislation in 1967.
In 2017 the government announced plans to tackle the growing problem of newly-built houses being sold as leasehold rather than freehold and to limit ground rents in newly created lease agreements.
Leasehold reform was included in the Law Commission 13th Programme of Law Reform which included attempts to make buying the freehold or extending the lease ‘easier, faster and cheaper’.
On 28 March 2019 an industry pledge signed by 64 developers or agents was published in which housing developers agreed to help existing leaseholders with onerous ground rent terms but this was not legally binding.
Speculators who have bought blocks of freeholds with the intention of milking the leaseholders will not have signed up to this.
One may question why anyone, properly advised, would buy a leasehold house. However in some parts of the country new build houses were frequently being sold only on a leasehold basis and if a purchaser wanted a house on a particular estate freehold was not being offered as an option.
Purchasers were typically told that they could buy the freehold later if they wanted to at a low price which turned out later to be much higher once the freehold had been sold on to an investor.
Commonhold
For those buying flats an alternative to leasehold, called commonhold, has been available however for various reasons familiar to us in the business this has proved to be a flop. Actual sales of flats using commonhold have been negligible.
The government is now keen to revive commonhold. It will be interesting to see how they get on with it.
Peter Glover is a chartered surveyor and author of ‘Building Surveys’ and ‘Buying a House or Flat’
