Mortgage Rejected Due To Leasehold Ground Rent ....

SteeleyScott

Hello,

I'm in the process selling a property, there is a buyer lined up, who, however  has unfortunately had two mortgage lenders reject for reasons of ground rent.

For reference, this property is valued at £273k with a lease that can increase based on index at an interval of every 15 years. It went up this year from £210 to £360 per annum and cant increase again till 2036.

I dont recall going through any level of scrutiny like this when I purchased the property back in 2013, have things become stricter since then? Surely a great deal of newer build leasehold properties are going to be rejected on this notion in that case? Or am I missing something really obvious here?  

Could the problem be with the buyers' lending criteria? I don't understand how this wasn't a problem when I bought it 8 years ago, but now it is? 


Has anyone experienced this and can offer some guidance on how they mitigated this? Realistically what are my options to get us around this?

thanks so much,

Ged

MaryNB

Are you outside of London? If so, once the ground rent went above £250 it became an Assured Tenancy which makes it much easier for the freeholder to take back the lease if you are a few months behind on ground rent. That could be an issue for your buyer's lender. If this is the case lenders sometimes require the buyer to take out indemnity insurance to protect the lender's interest. Or they could reject the application.

propertyhunter

Agree with the previous response. The lender is worried about assured shorthold tenancy. This basically means that the lease could be forfeited and handed back to the freeholder if you fall behind on ground rent payments for three months. In order to make your property sellable to anyone who isn't a cash buyer, you need to obtain a deed of variation so that you can remove the ground rent clause from your lease. When you say it increases on index every 15 years, what index exactly? Just want to confirm this isn't a doubling ground rent not linked to inflation. This worries lenders more - as well as the interval being short (every 10 or 15 years vs. 25 years). 

I sold a leasehold property with ground rent doubling every 25 years, but it was in London and would not have reached the £1000 threshold for 43 years. In order to make it go through, we also had to offer an indemnity to the buyer.

strawberries1

Three years ago I almost bought a maisonette with doubling ground rent every 25yrs in Hillingdon. It became known to me after I got the legal report and I felt more uneasy by the day. I spoke to leasehold experts, did a lot of research but it still didn't feel safe. I pulled out as a similar one came on the market. I'm so glad I did. I extended the lease and got a peppercorn rent. Very happy.

I say this to say that once it begins to increase some will get uneasy about it.

SteeleyScott

Very interesting, thanks for the replies  and insight all.

To answer to the points raised

:- RE: Location Yes this is outside London, Manchester.

:- RE Assured Tenancy - I actually made a typo there, the agreement began in 2006 (when the house was first sold) at a yearly ground rent figure of £270, it's never been lower than that. Does the comment RE: Assured tenancy still apply then?

:-  RE: Indemnity policy / Deed Of Variation -  If it was rejected due to one of these being absent - Should I have gotten some sort of feedback that the Mortgage was being rejected due to their absence? and therefore given either myself or the buyer notice of opportunity to have something put in place so the mortgage goes through?

:- RE: Index - Reading the original agreement, it says 'the "index" means the index of retail prices (all items) published H M Government or any official publication substituted for it

:- I've read a couple articles online this evening about the ground rent having to be no higher than 0.1% of the property valuation for lenders criteria to be satisfied...I saw no mention of that in your guys' insights above...is this then not true?

:- I should also point out the original lease was 155 years, beginning in 2006, so 140 remaining.

thanks so much,

NameUnavailable

Leasehold property issues are very much a hot topic these days and this is just one issue that is causing lenders to baulk

https://www.mishcon.com/news/publications/real_insights_-_property_update_05_2017/assured_tenancy_traps__the_unexpected_ast_05_2017

The answer is to get a statutory lease extension and reduce the ground rent to peppercorn, or possibly negotiate a deed of variation to just deal with the ground rent (reduce it to peppercorn or a fixed amount not more than £250) with the freeholder, if they're willing to do so.

SteeleyScott

NameUnavailable said:

Leasehold property issues are very much a hot topic these days and this is just one issue that is causing lenders to baulk

https://www.mishcon.com/news/publications/real_insights_-_property_update_05_2017/assured_tenancy_traps__the_unexpected_ast_05_2017

The answer is to get a statutory lease extension and reduce the ground rent to peppercorn, or possibly negotiate a deed of variation to just deal with the ground rent (reduce it to peppercorn or a fixed amount not more than £250) with the freeholder, if they're willing to do so.

Would the extension proceed as a section 42? In which I assume there'd be a large upfront payment made to the freeholder to ensure they're not out of pocket?

Deed Of Variation reducing to sub £250, I also assume there'd be a large payment upfront, for the same  reasons as above?

MaryNB

SteeleyScott said:

Very interesting, thanks for the replies  and insight all.

To answer to the points raised

:- RE: Location Yes this is outside London, Manchester.

:- RE Assured Tenancy - I actually made a typo there, the agreement began in 2006 (when the house was first sold) at a yearly ground rent figure of £270, it's never been lower than that. Does the comment RE: Assured tenancy still apply then?

:-  RE: Indemnity policy / Deed Of Variation -  If it was rejected due to one of these being absent - Should I have gotten some sort of feedback that the Mortgage was being rejected due to their absence? and therefore given either myself or the buyer notice of opportunity to have something put in place so the mortgage goes through?

:- RE: Index - Reading the original agreement, it says 'the "index" means the index of retail prices (all items) published H M Government or any official publication substituted for it

:- I've read a couple articles online this evening about the ground rent having to be no higher than 0.1% of the property valuation for lenders criteria to be satisfied...I saw no mention of that in your guys' insights above...is this then not true?

:- I should also point out the original lease was 155 years, beginning in 2006, so 140 remaining.

thanks so much,

That 0.1% could be an issue as well. I've seen it mentioned by a few posters here. There are a lot of pitfalls to watch out for with leaseholds and so many rules around ground rent.

Yes it's still an Assured Tenancy. It was when you bought it. It may not have been an issue for your lender then but they may have changed their criteria. Or it's not an issue for your lender but is for the two lenders your buyer applied to. 

The rules for statutory lease extension on houses are different to flats so make sure what ever you research refers to leasehold houses, not flats. Not all leasehold house owners have a right to a statutory lease extension. 

eddddy

SteeleyScott said:

NameUnavailable said:

Leasehold property issues are very much a hot topic these days and this is just one issue that is causing lenders to baulk

https://www.mishcon.com/news/publications/real_insights_-_property_update_05_2017/assured_tenancy_traps__the_unexpected_ast_05_2017

The answer is to get a statutory lease extension and reduce the ground rent to peppercorn, or possibly negotiate a deed of variation to just deal with the ground rent (reduce it to peppercorn or a fixed amount not more than £250) with the freeholder, if they're willing to do so.

Would the extension proceed as a section 42? In which I assume there'd be a large upfront payment made to the freeholder to ensure they're not out of pocket?

Deed Of Variation reducing to sub £250, I also assume there'd be a large payment upfront, for the same  reasons as above?

If it's a house - you would typically want to buy the freehold (then there's no more ground rent).

With a house - s statutory lease extension wouldn't help (it doesn't reduce the ground rent).

If you wanted a Deed of Variation - you'd have to negotiate terms with the freeholder. The freeholder doesn't have to agree, and they can ask any price they want.

SteeleyScott

MaryNB said:

 The rules for statutory lease extension on houses are different to flats so make sure what ever you research refers to leasehold houses, not flats. Not all leasehold house owners have a right to a statutory lease extension. 

What are the differences? I contacted the property management company of the freeholder this morning, they informed me that they only accept lease extensions on flats, not houses. Though when I challenged whether that was an internal policy and whether i'd be able to do an extension if my solicitor dealt directly with the freeholder, they weren't able to comment. So at a bit of a loss with whether I should be pursuing an extension at this point. I can't say i've read anything in the original agreement that prevents an extension.

m0bov

Do a statutory lease extension on peppercorn, increase the sale price.