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