Leasehold Property and the CML Handbook

When acting for a client who is purchasing a property with the aid of a mortgage, a conveyancer is under an obligation to act within accordance of the duty of care to their client but also to the lender, writes Alice Seager, trainee with MJP Conveyancing.

The duty to the lender  is governed by the Council of Mortgage Lenders, who describe themselves as "the representative voice for the residential mortgage lending industry". 

They are  an industrial body representing mortgage lenders in the UK - its members consisting of banks, building societies and specialist lenders. It is estimated that the Council of Mortgage Lenders (CML) represents 90% of mortgage lending within the UK

Leasehold transactions are long accepted to involve extra work for conveyancers - it is imperative that onerous obligations are brought to the attention of clients. There are issues such as ground  rent and service charge etc to be brought to consider - but further the CML hand book imposes further conditions which are required in a leasehold transaction.

As such conveyancers are obliged to ensure that the lease applicable to the title of a leasehold property is "CML Compliant". The effect obligation renders the process of purchasing leasehold property to be arguably a complex one. This is particularly the case with older leases drafted prior to the introduction of the CML handbook.

The Basic Requirement of CML:

CML requires conveyancers to confirm that there is a good and marketable title to the property. Meaning that the property is free of any restrictions, covenants, charges  etc which are materially detrimental to the value of the property.

It is arguable that leasehold properties by their nature tend to be inclusive of more restrictions and covenants than a typical freehold transaction. Therefore there are more aspects to consider when determining whether or not it is possible to guarantee that a property has a good and marketable title to a prospective lender.

CML Leasehold Requirements:

The first issue that a conveyancer should consider when reviewing leasehold title is the class of title that the Land Registry have granted. Ideally, this should be title absolute. Meaning that the title deeds are in order and that no other individual has a claim to the land. In respect to leasehold property, this means that the lease has been validly granted and that the lease under which the land is held is vested in the freeholder.  

Where an inferior class of title is granted the CML provides that good leasehold title will be acceptable, provided certain other requirements are fulfilled. Good leasehold title is granted when the lessor's title is not registered with title absolute or the title is unregistered. I.e the leasehold title is registered but the freehold is not. 

In this instance a conveyancer should be satisfied that there is evidence of the freehold title which dates back 15 years. Although the CML are providing instances where good leasehold title is acceptable - in practise this is not necessarily of much assistance to a prospective purchaser. If it is possible to provide evidence of the freehold title back dating 15 years, then it is highly likely that the Land Registry would upgrade the preferred class of title absolute and remedy the problem.

It is a further requirement of CML in leasehold transactions that the lease includes an enforceability covenant rendering it an obligation on the landlord to enforce other lessees covenants. The effect of not having such covenant in place is that a lessee, who is for example suffering  nuisance from a fellow lessee does not have the ability to force the landlord to resolve the problem. 

Conveyancers are required to further ensure that the responsibility for insuring the property is that of the landlord, one or more of the tenants or the management company. Conveyancers must be satisfied that there is a sufficient insurance policy in place for the leasehold property. There is no consistent approach to the issue of insurance, as times evolve the definition of "insurable risks" changes. For example, when older leases dating back to the 1970s and 1980s were drafted the need to insure against the risk of terrorism was not one contemplated.

If the Lease is not CML compliant?

If throughout the course of a transaction, it is deemed that a lease is potentially not compliant with CML requirements - the first course of action is to notify the lender and obtain their instructions. The onus is then often reverted back as the lender instructs the conveyancer to act in order to protect their interest.

The defect in the lease will then require rectification and there are few options available to clients in this situation. The first option is for the lessee and the landlord to enter into a Deed of Variation to alter the terms of the lease in order to comply with CML requirements.

Alternatively, lenders will often accept indemnity insurance in order to "remedy" the defect with the lease. However, prospective purchasers should note that this route will merely offer a "quick fix". Wherever possible conveyancers should seek to obtain a Deed of Variation to truly correct the defect.  

It can therefore be concluded to establish that a lease is CML compliant "is not the be all and end all". 

There are practical implications of the various covenants which must be taken into consideration by conveyancers when reporting to clients intending to purchase a leasehold property and these implications typically do not concern the CML.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

A Watertight Approach to Flood Insurance

With the Environment Agency citing that one in six homes in England are at risk from various forms of flooding, flood insurance has become a much debated topic of late. 

In the third of a series of articles penned by trainees of MJP Conveyancing as apart of the Company's ongoing training programme, Beth Slaughter writes:

Whilst Britain was battered by strong storms earlier this year, the conveyancing industry became inundated with concerns over the availability and affordability of flood insurance for homeowners. With the Water Bill currently passing through Parliament, this article indulges the national obsession with the weather, analysing the current political position as to flood insurance in relation to leasehold property, as well as what issues a potential purchaser of a leasehold property should be wary of when entering the leasehold property market.

Until June 2013, there existed an agreement between the UK government and the insurance industry which permitted individuals to obtain flood risk insurance for their properties even though they might be located in a high risk area and, in exchange, the government promised to maintain its spending on flood defences. This ‘Statement of Principles’ was only ever intended to be a temporary measure and has been criticised for its restriction of customer choice – insurers are only committed to their existing customers and new insurers can decide to whom to offer flood insurance and, additionally, the Statement does not guarantee affordable insurance premiums or manageable excesses for homeowners. The Water Bill Act 2014 has posed an opportunity for the government to turn the tide on the current approach to flood insurance, ensuring that it remains widely affordable and available – this is manifest in their Flood Re proposal, which is due to come into force in 2015. In essence, Flood Re provides that all buildings insurance will carry a levy that will be used to subsidise flood claims from high-risk households, thus reducing the premiums homeowners have to pay. Unfortunately, as currently defined, Flood Re will exclude buildings cover for flood insurance within a variety of sectors including council homes, the private rented sector, and, notably, leasehold properties.

With respect to leasehold properties, it is usually the responsibility of the Freeholder – or Management Company – to insure the building; they, in turn, pass this cost on to the leaseholder through their management charges. Insurance providers thus dub leasehold property to be ‘non-domestic’ and protection under the Flood Re scheme as it currently stands would be void. It has been argued that the decision to exclude leasehold property from Flood Re is politically motivated, as it prevents homeowners subsiding businesses, however, this is a fallacy, as it is the leaseholder themselves that would ultimately suffer. Ironically, the ‘floodgates’ argument has also been cited as a reason for the narrow delineation of property in Flood Re, as expanding the scope of the government’s proposals would push up the levy on all households; as a spokesman for the Association of British Insurers states: ‘Excluded properties should still get insurance, it’s just the cost won’t be capped. Flood Re is designed to focus on areas where the lack of affordable and available cover is most acute. We have to draw the line somewhere’. Both the British Property Federation (BPF) and the Council of Mortgage Lenders (CML) strongly oppose Flood Re as currently defined; the Director General of the CML note that they ‘find it difficult to believe that the original policy intention was to exclude a whole swathe of residential property from the stated aim of ensuring that affordable flood insurance continued to be available across the market’.  

The potential purchaser of a leasehold property has much to consider in respect of flood risk insurance. Under the Law Society regulations, when buying a property a Conveyancer should make the client aware of the potential flood risk to some properties; though conveyancers cannot compel a client to carry out an environmental search and a flood search, these are strongly recommended. Purchasers should note that their legal advisors can report to them on the search results, but cannot comment on any specialist issues which arise in the search – such concerns should be referred to a surveyor. Further information regarding the prevalence of flooding in any given area can also be obtained free-of-charge on the Flood Agency website – http://www.environment-agency.gov.uk/homeandleisure/floods/  - however, visitors to this site should note that it only records flooding in relation to river or sea level changes, and does not provide information about a specific property, whereas specific searches draw on more detailed data. It is for these limitations that purchasers should not solely rely on this website.  

As aforementioned, it is usually the case with leasehold properties that the Freeholder – or Managing Agent – arrange the insurance policy for the building. Purchasers should request a copy of the insurance policy and provide the same to a specialist broker who will be able to advise them as to the adequacy of the cover. Caution should be taken that the policy is sufficient for the particular building in question, incorporating both the internal and external elements of the building. Insurance might notionally cover a building for flood damage, but with heavy caveats – excesses may be large and there may be particular exclusions. Indeed, if flooding becomes an uninsured risk, the leaseholder may be liable to make good any damage depending on the wording of the lease.

Finally, as the CML demands flood insurance as standard, considerable increases in insurance premiums and excesses could affect the affordability – and even viability – of mortgages. The Law Society notes that lenders are increasingly likely to investigate the flood risk of a property when undertaking a valuation and may impose requirements on the mortgagee as a result of their findings. Difficulties in obtaining mortgages and insurance may impact of the saleability of leasehold properties, reducing the number of potential purchasers and purchase price alike. 

Purchasers should consider that if a property is in a high risk flood zone, it does not necessarily that they should not purchase the property; the purchase price could be re-negotiated to allow monies to be invested in flood resistance measures on the property, such as non-returning valves and self-raising barriers.

 With an estimated five million leasehold properties in England and Wales and approximately 840,000 thought to be at risk of flooding, issues surrounding the accessibility and affordability of flood insurance is no small matter. As Ian Fletcher, the Director of Policy at BPF, notes: ‘every property that is occupied is somebody’s home and investment. Flood doesn’t discriminate between freehold and leasehold…and it is of small comfort having contents cover if the building itself is left uninhabitable’. Perhaps the Government will rescue thousands of leaseholders in an eleventh hour amendment to the Water Bill; if not, individuals are best to err on the side of caution when buying leasehold property so that they are not submerged under spiralling insurance premiums.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

Caveat emptor - Leasehold buyers beware!

The difference between freehold and leasehold is if you own a leasehold property you do not own the building or the land it sits on, instead you have the right to occupy the property for a fixed period of time. 

Here, writes Charlotte Ribbons, Trainee Solicitor with MJP Conveyancing, are some areas savvy leasehold buyers need to make sure they are clued up on before purchasing: 

The 'term' of the lease is important. This can typically be between 99 and 999 years. Mortgage companies will usually require there to be 70 years remaining on the term before they will lend. This is an area cash buyers should not ignore because if you later come to sell the property to a buyer needing a mortgage this will matter! It can be costly and time consuming to extend the lease term; what might seem like a 'bargain' may not be in the long run. 

Ground Rent - know your figures! This is the rent payable to the Landlord or Freeholder. It can be fixed or escalating. Your solicitor should draw this to your attention. Where there is a complex escalating clause you may need to seek further advice from a surveyor. 

Service Charge - it's important not just to know what this years’ service charge is going to be but what future service charge costs are likely. The Lessor Pack should include the statements of accounts for the last three years. Does the charge keep increasing? If so, why? 

If the accounts aren't in a healthy state this should ring alarm bells. Find out more about the Management Company and how efficient they are. The best way to do this is to speak to existing tenants and see what they have to say. 

It is possible that the service charge accounts for the current year are not yet finalised. In this circumstance your competent solicitor may seek a ‘retention’ to cover this. This would mean a sum of monies from the sale proceeds are held back to pay for this cost once the amount is known. 

Survey - the importance of having a survey carried out cannot be emphasised enough. Whilst the Lessor Pack can reveal major works which are anticipated, a survey will also be a valuable tool in this regard. If major works are required, once you become the owner of the property you will be responsible for paying a proportion of the cost. What may seem like a bargain may not be quite the investment, once factoring in paying towards the cost of a new roof!

Flooding- Just because you may be occupying the third floor does not mean flooding will not affect you! If the ground floor is flooded you will not be able to access your property, structural damage may be caused and key elements such as lifts may not function. Estimates from the British Property Federation and Leasehold Knowledge Partnership show 70,000 leasehold properties are at high risk of flooding. 

This could leave you at risk to potentially huge increased premiums, particularly as it is still unknown, but considered likely, that leasehold property will be excluded from the national flood subsidy scheme.  

The key to purchasing a leasehold property is to make sure you know exactly what you are purchasing, what your obligations and what the likely costs are now and in the future! 

Disclaimer: Please note this article does not constitute as legal advice and is for reference only. 

Wind Farms: Friend or Foe to a home buyer?

Wind turbines  are on the increase and  this is of no surprise when the  UK is known to be one of the best locations for wind power in the world. 

The UK is ranked as the world's sixth largest producer of wind power, having recently overtaken France and Italy. 

Wind power delivers a growing fraction of the energy in the United Kingdom and at the beginning of January 2014, wind power in the United Kingdom consisted of 5,276 wind turbines.

The odds of encountering one of these turbines or a planing application for one to be installed are increasing.  The importance of identifying the location of a turbine and of any planning application when moving home  has now therefore become a feature of the legal due diligence involved when buying a new home. 

Your conveyancing lawyer needs to make sure the environmental search result covers wind energy and to ensure you are altered if there is a turbine in the immediate vicinity of the property you are looking to purchase. Your advisor should also recommend a planning search to see if there is any application before the council for the installation of a turbine.   This is not a standard search and therefore you should always ask your lawyer to carry one out if wind farm activity is a concern. 

Buying a property in the immediate vicinity of the property could affect the value and if you are borrowing money your lawyer will be required to report the finding to your lender.  This is because the valuation on which the loan offer could be affected. More to the point its not advisable to purchase a property which you may then have problems re-selling in the future. 

So why would a turbine in close proximity have impact on the value of the property?

Visual Impact

Some people like the sight of a turbine but many others find the turbine a ‘turn off’. 

Lighting 

If the turbine is over 200 feet in height it has to have a light attached.  This could be a static or flashing light.  It could be viewed by some as a nuisance. 

The flickering of light caused by the wings of the turbine as they turn can also create a nuisance for those living in close vicinity especially in bright and sunny weather. 

Noise

The turbine does emit a noise.  The impact of this depends on the terrain, the direction of the wind, and the wind pattern.  The noise resembles that of a refrigerator and can travel for several hundred feet.  It commonly considered that those living more than half a mile away are unlikely to be troubled by the emission of noise. 

Health 

There is no evidence that turbines are likely to have a direct affect on health. 

However a 2008 guest editorial in Environmental Health Perspectives published by the National Institute of Environmental Health Sciences, the U.S. National Institutes of Health, stated: "Even seemingly clean sources of energy can have implications on human health. Wind energy will undoubtedly create noise, which increases stress, which in turn increases the risk of cardiovascular disease and cancer.

Lawyers are not environmental experts nor are they valuers; their duty is to make the client aware of the existence of the turbine and advise a client to discuss the implications of its location and proximity with a surveyor as well as an environmental expert so as to ensure an informed decision is made before the client commits to the purchase. 

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

Reconstructing your conveyancing practice

Moving to a new conveyancing approach with technology at its heart, which allows you to keep track of any transaction at any time - and potentially involves lawyers for the other side - is a painful but necessary process, says David Pett as he shares his own recent experience:

Read Here: http://bit.ly/1gQGbSr

Service Charge – Could the monopoly finally be coming to an end?

Forward

Our business attaches a high value to training and as such we actively encourage all of our junior staff to compile articles on subjects which are of interest and which contain elements which will be of interest to consumers. 

In the first of these articles which forms part of our current training programme running for the next two months involving leasehold Kris has chosen a topic dear to any one which has purchased a leasehold property in the past.      

The article focuses on the hidden costs of purchasing a leasehold flat or house and of the efforts being made to bring about the long overdue changes needed to ensure this sector of the housing market is adequately regulated.

Kris would welcome your feedback and can be contacted at KristianN@mjpconveyancing.com

David Pett Director

5/3/2014

Kris writes:

As conveyancing business with over 100 live leasehold transactions at any point in time, a major conflict which we attempt to placate and pacify on a daily basis is the freeholder versus leaseholder battle of power.

We act as a bearer of bad news for both buyers and sellers alike. Buyers often lambaste the service charge budget as a ‘hidden cost’ before they've even made it over the proverbial threshold, whereas sellers grumble at the expense and length of time it takes the autocracy like institution that is their management company to produce a standard sales pack.

As a neutral in the on-going saga, I have always felt that it is the freeholder who dictates the balance of power. The seller is unable to sell without the freeholder’s intervention and likewise, the buyer is unable to register their purchase without seeking the infamous ‘certificate of compliance’ from the management company. However, much like the Boston Tea Party signified the beginning of a turning of the tide in the American War of Independence, it appears that the Office of Fair Trading have sparked a similarly rebellious (but considerably drier) attitude among leaseholders.

Times are changing

The Office of Fair Trading (OFT) will fully investigate the love-hate relationship at the centre of the leasehold property market and has pledged to issue a report by the end of 2014. In particular, the OFT will seek to identify:

1.   Whether managing agents and freeholders have the same interests as leaseholders in, for instance, keeping down costs for maintenance work or building insurance;

2.   Whether leaseholders have adequate interest on decisions taken by freeholders on the appointment of managing agents and the supply of residential property management services;

3.     Whether there is true competition between property managers;

4.  Whether the choice of contractors and services to leasehold properties may be unfairly influenced by links with associated companies;

Rachel Merelie, Senior Responsible Officer for the investigation comments that “Service charges for the maintenance of a building can be substantial and we want to make sure that leaseholders are getting a fair deal”.

Monopoly

In my opinion, the current market is far too slanted in favour of the freeholder and whether leaseholders do get a ‘fair deal’ is largely dependent upon chance.

As responsible conveyancers, it is our duty to alert any potential leasehold purchaser of the added (and often unexpected) costs that they will be liable for throughout the entire term of their ownership. Does the building require a new lift? Yes – then as a leaseholder you will be expected to pay for this. What about landscape gardening? – check, decoration of the lobby? – check, tropical fish for the aquarium? – check.

A competent conveyancer should flag up the service charge budget in the management pack for you to study in depth, and the decision about whether this is fair and reasonable should be made well before, returning to our cliché, you ‘cross the threshold’.

The same should be said of selling a leasehold property.

A complaint we often find levied upon freeholders is that leaseholders are not made aware of the substantial (almost always triple figure) costs and turnaround times involved in obtaining a leasehold management pack – the notorious skeleton key when it comes to selling a leasehold property.

Relying on best practices we always seek to obtain this figure for prospective purchasers prior to completing their transaction so that, in years to come when they decide to sell the property, they do not find themselves burdened with this unexpected and untimely cost.

Again, this serves as a further example of when you should push your conveyancer to seek all the information on your behalf rather than neglect due diligence in favour of a quick completion.

Advantages amongst the autocracy

Buying a leasehold property should not be considered a completely wasted investment however:

1.   There are clearly defined rules in place which will prevent neighbours devaluing your     property;

2.    If you are ‘time-poor’, it makes perfect sense for somebody else to address maintenance issues on your behalf;

3.    There is a clear agreement upon what proportion you are to pay if urgent remedial work is necessary on the building;

4.    Statutory protection for leaseholders does exist;

5.    Historically, leasehold properties are marginally cheaper than their freehold equivalent.

At MJP, we utilize an online case management system called Quick Conveyance that puts all those ‘need to know’ facts figures into one place at your fingertips for you to consider and weigh up prior to buying your leasehold property. We make sure the lease, the management pack and all leasehold enquiries are made available to you online in PDF format so that the only time you are truly ‘in the dark’ with your leasehold purchase is when you turn the lights off to settle down for your first night’s sleep post-completion.

For a competitive quote, please call our New Business Team, available 24/7 at www.mjpconveyancing.com .

By Kristian Nelson, Trainee Solicitor at MJP Conveyancing