Hit a snag on purchase of ex-council flat in Islington

jmd4211

Hello everyone,

Just wanted to court some expert advice, if anyone is in a position to offer some. It relates to the purchase of an ex-LA 2 bed lat in Islington - so far everything has proceeded well, my mortgage (finally) got approved, so it was all resting with the legal types. Got an email this morning from my solicitor, attaching a letter he had sent to the vendor's solicitor, in regard to the lease:

On checking the lease once more, we have a concern arising from the proviso to clause 7(c). The obligation on the landlord is to insure the premises in the full reinstatememnt value of it which will, as you will appreciate, be significantly less than the market value of the property. If the property is not rebuilt or reinstated, our client would not receive back the value of the property. Of more importance, this would not be acceptable to his lender. The Proviso is more appropriate to a commercial lease, rather than a residential lease and should, we suggest, be removed from the clause. Would you please contact the council urgently to establish if it would be prepared to remove the Proviso. As we mention above, we do consider that the lease is unmortageable if the Proviso is to remain'

This feels like very bad news - do people think its likely the council would modify the lease? Surely, in the event of some disaster they would have an obligation to rebuild or re-instate?

BitterAndTwisted

Councils often do whatever it is that suits them. Has anyone pointed out some of the major disadvantages of buying an ex-Council flat apart from that clause? How big is the development?

jmd4211

The development itself is quite large, but its set into smaller blocks of flats

abankerbutnotafatcat

Have you asked the lawyer what the lease says in the instance of the property no longer being there due to being destroyed/demolished?

BitterAndTwisted

As part of the "Decent Homes" thingy the Council could decide in a few years to carry out major works and the leaseholders could be stuck with massive bills. In some instances for tens of thousands of pounds, most especially those with flat roofs or lifts. I would suggest that if you have a choice you find another property. What's the price differential between what you're looking at now and a terraced conversion over three floors for instance?

phill99

Can't see what the problem is. All houses are insured as to their reinstatement value, not their open market value.

JimmyTheWig

phill99 wrote: »

Can't see what the problem is. All houses are insured as to their reinstatement value, not their open market value.

That's what I was thinking, Phil. I wonder what the solicitor's problem with it is.

abankerbutnotafatcat

The difference is that this is a leasehold whereas if it's a freehold you still own the land. Hence why I asked what the lease says? It may be that the freeholder i.e. LBI is obliged to reinstate or compensate if they don't.

lincroft1710

phill99 wrote: »

Can't see what the problem is. All houses are insured as to their reinstatement value, not their open market value.

I agree with this.

chappers

The problem is that the buyer pays say £200k for the property and the freeholder insures it for the reinstaement value of say £100k if the place falls down and the freeholder decides not to rebuild the buyer is out of pocket to the tune of £100k.
That is the nuts and bolts of the solicitors/lenders concerns.
However as you are purchasing one of the properties in a council owned block there should be some other form of compensation written into the lease, for such eventualities.
Also bear in mind that many councils don't bother insuring the housing stock they own due to prohibitive costs.However they would be obliged to insure any properties owned by a third party.
I am no expert in insurance but would have thought it highly unlikely that any insurer would give buildings insurance to cover market value.

jmd4211

Further clarification, as requested by me:

Clause 7(3) of the Lease includes an express obligation to rebuild or reinstate in the event of damage or destruction, but then continues with the proviso that covers a situation where the building/premises are not rebuilt or reinstated "for any reason". If such a reason existed, it would typically be if an owner were unable to obtain a necessary planning permission to rebuild, etc., from a local authority. In this case, the landlord/owner is the local authority, which raises the question of what circumstance might arise which would persuade the Council that it could not rebuild or reinstate. This is another argument why the Council should agree to remove the proviso, but we do need to receive its agreement to this or an explanation as to why it thinks it should remain. Obviously, we hope it would do the former.