When purchasing a property with freehold title, on completion you will own the property and the land it is situated on, outright. You purchase the property from the seller, and in the majority of cases, no third party is involved in the transaction. When purchasing a leasehold property, there are likely to be other parties involved, such as a Landlord and Managing Agent, Landlord’s solicitors to name but a few. Any one of these parties can complicate or delay the conveyancing process. Leasehold conveyancing transactions, traditionally, can therefore take considerably longer to progress through to completion.
The lease itself is a formal document which creates a property, but only for a specific length of time, or term. On the face of it, this seems simple enough but this area of conveyancing is full of complexities and pitfalls which illustrates why a qualified conveyancing lawyer should be instructed when purchasing a leasehold property. Due to the additional work in leasehold conveyancing you should expect to pay higher conveyancing fees for leasehold conveyancing.
The lease is a complex and often lengthy document which includes covenants, restriction, conditions and rights in the effort to assist the parties in all eventualities during their ownership of the property. No lease is identical to any other, and it is it this that requires each lease to be looked at thoroughly by a purchaser’s legal representative. All terms of the lease should be checked to ensure that the necessary terms are included, and any that should be avoided.
The process of purchasing a leasehold property can be complicated further due to leases on older properties not meeting with today’s legal requirements set by lenders. The CML Lenders’ Handbook provides comprehensive instructions for conveyancing lawyers acting on behalf of lenders in residential conveyancing transactions. There are specific requirements relating to leasehold properties which are required by all lenders in England and Wales. The leasehold requirements read as follows :
“5. 10. 1 Our requirements on the unexpired term of a lease offered as security are set out in part 2.
5. 10. 2 There must be no provision for forfeiture on the insolvency of the tenant or any superior tenant.
5. 10. 3 The only situations where we will accept a restriction on the mortgage or assignment (whether by a tenant or a mortgagee) of the lease is where the person whose consent needs to be obtained cannot unreasonably withhold giving consent. The necessary consent for the particular transaction must be obtained before completion. If the lease requires consent to an assignment or mortgage to be obtained, you must obtain these on or before completion (this is particularly important if the lease is a shared ownership lease). You must not complete without them.
5. 10. 4 You must take reasonable steps to check that: 5. 10. 4. 1 there are satisfactory legal rights, particularly for access, services, support, shelter and protection; and
5. 10. 4. 2 there are also adequate covenants and arrangements in respect of the following matters, building insurance, maintenance and repair of the structure, foundations, main walls, roof, common parts, common services and grounds (the “common services”).
5. 10. 5 You should ensure that responsibility for the insurance, maintenance and repair of the common services is that of:
5. 10. 5. 1 the landlord; or
5. 10. 5. 2 one or more of the tenants in the building of which the property forms part; or
5. 10. 5. 3 the management company – see paragraph 5. 11.
5. 10. 6 Where the responsibility for the insurance, maintenance and repair of the common services is that of one or more of the tenants;
5. 10. 6. 1 the lease must contain adequate provisions for the enforcement of these obligations by the landlord or management company at the request of the tenant.
5. 10. 6. 2 In the absence of a provision in the lease that all leases of other flats in the block are in, or will be granted in, substantially similar form, you should take reasonable steps to check that the leases of the other flats are in similar form. If you are unable to do so, you should effect indemnity insurance (see paragraph 9). This is not essential if the landlord is responsible for the maintenance and repair of the main structure.
5. 10. 6. 3 We do not require enforceability covenants mutual or otherwise for other tenant covenants.
5. 10. 7 We have no objection to a lease which contains provision for a periodic increase of the ground rent provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable. If you consider any increase in the ground rent may materially affect the value of the property, you must report this to us (see part 2).
5. 10. 8 You should enquire whether the landlord or managing agent foresees any significant increase in the level of the service charge in the reasonably foreseeable future and, if there is, you must report to us (see part 2).
5. 10. 9 If the terms of the lease are unsatisfactory, you must obtain a suitable deed of variation to remedy the defect. We may accept indemnity insurance (see paragraph 9). See part 2 for our requirements.
5. 10. 10 You must obtain on completion a clear receipt or other appropriate written confirmation for the last payment of ground rent and service charge from the landlord or managing agents on behalf of the landlord. Check part 2 to see if it must be sent to us after completion. If confirmation of payment from the landlord cannot be obtained, we are prepared to proceed provided that you are satisfied that the absence of the landlord is common practice in the district where the property is situated, the seller confirms there are no breaches of the terms of the lease, you are satisfied that our security will not be prejudiced by the absence of such a receipt and you provide us with a clear certificate of title.
5. 10. 11 Notice of the mortgage must be served on the landlord and any management company immediately following completion, whether or not the lease requires it. If you cannot obtain receipt of the notice then, as a last resort, suitable evidence of the service of the notice on the landlord should be provided. Check part 2 to see if a receipted copy of the notice or evidence of service must be sent to us after completion.
5. 10. 12 We will accept leases which require the property to be sold on the open market if re-building or reinstatement is frustrated provided the insurance proceeds and the proceeds of sale are shared between the landlord and tenant in proportion to their respective interests.
5. 10. 13 You must report to us (see part 2) if it becomes apparent that the landlord is either absent or insolvent. If we are to lend, we may require indemnity insurance (see paragraph 9). See part 2 for our requirements.
5. 10. 14 If the leasehold title is registered but the lease has been lost, we are prepared to proceed provided you have checked a Land Registry produced copy of the registered lease. Whilst this will not be an official copy of the lease you may accept it as sufficient evidence of the lease and its terms when approving the title for mortgage purposes provided it is, on its face, a complete copy. ”
There is reference above to leasehold requirements being further set out in Part 2. The Lenders’ Handbook is divided into two parts. Part 1 of the CML Lender’s Handbook sets out the main instructions. Part 2 details each lender’s specific requirements.
The amount of time left to run on the lease should always be checked, especially when purchasing with the assistance of a mortgage. Some lenders will refuse to lend when there is 60 years or less to run.
In every leasehold transaction specific enquiries should be made relating to insurance and maintenance for the property. A request should also be made for the last three years service charge accounts, and an up to date insurance schedule, and this can lengthen the process still further. An up to date ground rent receipt is also required to show whether there are any rent arrears, and also provide evidence that there are no existing breaches of covenant by the owner.
Any obligations upon the new lessee should be noted, for example, if a Deed of Covenant or License to Assign is required to be entered into before completion. It also may be a requirement for References to be provided by the buyer.
Any provisions that are defective and which could result in the transaction breaking down, the seller can approach the Landlord to enter into a Deed of Variation. This will be required to registered at the Land Registry, at the same time as the change of ownership, after completion. The Deed will involve separate solicitors for the Landlord, and could lengthen the time still further for the conveyancing transaction.
The conveyancing process of purchasing a leasehold property contains far more complexities than a freehold property, which is why legal fees are somewhat increased when dealing with this aspect of conveyancing. Third parties, such as landlord, Managing Agents and Insurance Companies result in the transactions taking longer to complete in order for the information to be collated and reported to the buyer so that they are aware of their obligations, and the Landlord’s, from the beginning of their ownership. However, a straightforward leasehold transaction can happen, and problems are not present in every case.