Lease on maisonette - Advice urgently needed?!? BTL

Xxadele92xx

Hi everyone,
Myself and partner put an offer in on a first floor maisonette in the Birmingham area for £120k which was accepted (As a buy to let). Upon viewing this maisonette the place was immaculate, freshly decorated with new kitchen & bathroom. I can see the previous buyer bought the maisonette for £88k two years ago, did it up, extended the lease and is now trying to sell it on. This was previously up for sale, but it then fell through. We asked estate agents why it had fell through and they told us this was due to someone wanting to buy it but not having a tenant in place.. (This did not sit right with me).

Any how, offer in, offer accepted, valuation accepted, mortgage offer out, my solicitor starts looking through the lease and raising queries. He emailed me Friday to say he believes that this lease is a 'Toxic Lease' as the ground rent on this property is £75.00 per year. Every 25 years this doubles. So, after 25 years this will double to £150.00, another 25 yrs £300.00. Solicitor said his problem with this is that when ground rent exceeds £250.00+ the banks start to have a problem with this and will not lend, which will cause us to struggle selling this maisonette. He has now reported this to our lender and awaits their response. Even though this will not happen for 47 yrs he said he has a legal obligation to report this to us and the bank (which is fine). He then said his gut instinct was that we do not purchase the property (I work for a solicitors so they are doing the legal side for me). I asked if there was any way we could prevent the lease charges from doubling every 25 yrs and he said not unless the seller enters a 'Deed of Variation' which can be expensive. 

I am no expert in this area. I have one residential property and one other buy to let property (freehold). I personally believe the previous buyer pulled out for one of the reasons above but I am unsure. The area where we are purchasing this maisonette really is 'up and coming' as a HS2 station is set to be build 1 mile away from it which I believe will boost the price. 

Could anyone on here give me their honest opinion/advise on this lease? I will be £900 out of pocket if this doesn't go through but I would rather that than be stuck with a property my children cant sell on. 

eddddy

Your solicitor has summed up the situation well (not surprisingly, I guess) - I'm not sure that there's much else to add.

If you're correct that the EA lied about the reason the previous sale fell through - and it was because of the lease - check if the EA is a member of the Property Ombudsman Scheme (most are). If you follow the complaints procedure, the Ombudsman usually orders the EA to compensate you for your lost fees, if the EA misleads you about material information.

davidmcn

I would think it pretty unlikely that the relevant limit will still be £250 in 47 years' time - even now that's an absurdly small amount.

Xxadele92xx

Thank you - I have heard of the Legal Ombudsman (working in a legal firm) but I have never heard of the Property Ombudsman. The EA will be a member as they're a big chain in the Midlands. I have 100% been misled here by the EA. There was no mention of the doubling ground rent to me.  This has been with my solicitor for 4 weeks now, and this has happened. I emailed the estate agent asking for clarification as to why the previous sale fell through and I've had no response. I can almost guarantee it is the same reason. Upon further investigation (by myself) I noticed it was up for sale 18 months ago with a different estate agent and fell through. I called this estate agent on a whim and explained I was in the process of buying a property they advertised 18  months ago could the give me any info on why it didnt sell? The guy told me it was something to do with the seller being awkward and something on the lease. He said the notes were nearly 2 yrs old and it wasnt clear. 

anselld

Doubling every 25 years is not considered toxic by most lenders and the current rate is reasonable.  25 year doubling is approximately in line with average inflation (2.8%). 

It is a fairly technical issue when the ground rent exceeds £250 - In a nutshell under the Housing Act 1988, if a ground rent exceeds a yearly sum of £250.00 (outside of London and £1,000.00 inside of London) it is treated as an assured tenancy.  As such, if you fall behind with your ground rent by a period of 3 months or more (even if the landlord does not demand it), the landlord could seek possession of the property and the judge would have little or no discretion in the case.  As you say it is 47 years away, the law may change by then but lenders may become more paranoid in the meantime.

If you purchase then after 2 years you can eliminate the problem (if you feel it is one) by paying for a statutory lease extension which adds 90 years to the lease and eliminates the ground rent.  (Not sure why the previous owner did not extend via this route.)  Or, as stated, negotiate a deed of variation.

The problem you may have now is your Solicitor also acts for the lender so they may well ask the Solicitor's advice rather than deciding for themselves on the Lease issue.  If the Solicitor is negative towards the property they may well influence the lender to make the decision for you.

You can try to renegotiate the price if you feel this issue was not fairly reflected in your offer.  In future you should consider looking at the lease which can be obtained from Land Registry for £7 before committing to an offer or spending money on surveys, applications, legals, etc.

Xxadele92xx

anselld said:

Doubling every 25 years is not considered toxic by most lenders and the current rate is reasonable.  25 year doubling is approximately in line with average inflation. 

It is a fairly technical issue when the ground rent exceeds £250 - In a nutshell under the Housing Act 1988, if a ground rent exceeds a yearly sum of £250.00 (outside of London and £1,000.00 inside of London) it is treated as an assured tenancy.  As such, if you fall behind with your ground rent by a period of 3 months or more (even if the landlord does not demand it), the landlord could seek possession of the property and the judge would have little or no discretion in the case.  As you say it is 47 years away, the law may change by then but lenders may become more paranoid in the meantime.

If you purchase then after 2 years you can eliminate the problem (if you feel it is one) by paying for a statutory lease extension which adds 90 years to the lease and eliminates the ground rent.  (Not sure why the previous owner did not extend via this route.)  Or, as stated, negotiate a deed of variation.

Thank you - this is exactly what my Solicitor said to me - he said the previous buyer took the cheap route on the lease whereby the ground rent doubles every 25 yrs and cannot guarantee whether the legislation will change. There is 97 yrs left on the lease. I am unsure if the lender will ask my solicitors advise but he is against it. I am so undecided right now. We had a tenant ready to go in for when it completed. Do you think it would be reasonable to ask the seller to enter a deed of variation to prevent the doubling rent or has that ship sailed? (apologies if that is a dim question, I am not clued up on lease hold). 

anselld

There is no reason why you could not request the vendor to obtain an offer from the Freeholder on the cost of such a variation or even request that the vendor completes the variation prior to exchange.  However, it will severely delay proceedings and the vendor has already chosen once to go the "cheap" route so they are probably not likely to stomach the full cost.

Alternatively, get a RICS surveyor to estimate the cost of a statutory lease extension and factor some or all of that into your offer.

Xxadele92xx

I think the next steps are: Await the lenders feedback, then ask the vendor to complete the deed of variation. I am unsure how much this usually cost, any ideas? 

Slithery

I'd look for a different solicitor. Doubling every 25 years usually isn't an issue at all, it's leases that double every 15 years or less that are considered 'toxic'.

eddddy

Xxadele92xx said:

I think the next steps are: Await the lenders feedback, then ask the vendor to complete the deed of variation.

I am unsure how much this usually cost, any ideas? 

There  are no 'rules' on what it costs - it's whatever price the leaseholder and freeholder agree. 

But you could do a statutory lease extension to get the ground rent down to zero. You can agree that the seller starts the process before completion, then you finish the process. The cost of doing it that way should be more predictable.

There are online calculators, but they don't tend to allow for escalating ground rents. Here's an example:
https://www.lease-advice.org/calculator/

eddddy

Slithery said:

I'd look for a different solicitor. Doubling every 25 years usually isn't an issue at all, it's leases that double every 15 years or less that are considered 'toxic'.

  It's not the doubling ground rent that's the issue, it's that the ground rent can go above £250...

Xxadele92xx said:

Solicitor said his problem with this is that when ground rent exceeds £250.00+ the banks start to have a problem with this and will not lend, which will cause us to struggle selling this maisonette.

There are some comments from mortgage lenders about this here: https://www.cml.org.uk/lenders-handbook/englandandwales/question-list/1852/

For example:

Britannia
Where ground rent provisions cause (or, during the term of the mortgage, are likely to cause) the lease to be treated as an assured shorthold tenancy under the Housing Act 1988, this need not be reported to us if either:
(i) arrangements are made for the lease to be formally varied to restrict the ground rent below the statutory level (currently, an annual ground rent of more than £250 (or over £1,000 for properties in London)); or
(ii) a suitable indemnity policy (which complies with our requirements as set out in section 9 (Indemnity Insurance)) is put in place to protect us.

Natwest
N.B. if the ground rent exceeds £250 per annum (£1000 per annum for London properties) you must confirm that the terms of the lease in relation to the ground rent are acceptable. We can then approach the valuer to confirm whether the cost of the ground rent would affect property suitability and marketability.

Principality
Any ground rent which is currently at a level or, may reach a level referred to within the Housing Act 1988 (hence allowing a long lease to be treated as an AST) is NOT acceptable unless the Lease is varied or a suitable indemnity policy is put in place to protect us. The applicable legislation relates to leases with an annual ground rent of more than £250 (or over £1,000 for properties in London).

Edit to add...

Although TBH, the lenders tend to accept indemnity policies - so it's the owner (rather that the mortgage lender) who takes the risk.