Leasehold - Mortgagee Protection Clause

BigCoffeeMonster

Hi all,

I'm in the process of buying a leasehold house as a cash purchase. The lease runs for over 900 years and the freehold is owned buy a company set up by the owners of the houses - I'm told a share of freehold will be transferred as part of the purchase, but confirmation of this is yet to be confirmed despite being raised over three months ago.

In effect the house is and always will be held to the lease. My solicitor flagged the lease as not having a mortgagee protection clause (MPC) highlighting the risks as and when I come to sell as not many lenders will lend on the property. As part of the enquiries, we requested a deed of variation to the lease to include an MPC. Unfortunately, the freeholders rejected the request. 

My research has led me to understand the MPC is particularly important. Does anyone have any experience or recommendations with this?

Thank you in advance - all thoughts and experiences welcomed.

BW

eddddy

As an aside, it's very strange for a house to be "share of freehold". ("Shared freeholds" are for flats.)

For example, if there are 5 houses -

• Typically, it would be far more sensible for each house owner to own the freehold of their own house.

• It would seem daft to have a "shared freehold", meaning that each house owner owns 20% of all 5 houses

(And if each house owner owned their own freehold, the MPC issue could be easily solved.)




And if the lack of a MPC is making all their houses unmortgageable, it's strange that the joint freeholders are refusing to do lease variations to add MPCs.

What reasons did the joint freeholders give for refusing to do lease variations?

Have you discussed this refusal with the seller? 

And has the seller tried to discuss this with their neighbours - to try to make them see sense?

BigCoffeeMonster

Thanks for the response eddddy - yes, it's unusual. I should also add it's a probate property, which has made finding any information out about the house painfully slow.

When I embarked on the process, I was advised to buy the freehold when time permitted. It has since become clear that the owners of the houses (around 30 houses in total) set up a company a few years back and bought the freehold. As far as I can ascertain, they gave each owner a share of the freehold. The house itself is held under the lease, so when a decision needs to made on anything affecting the properties, I believe it is discussed among the freeholders and they go with the majority decision. This in effect means if I still want to buy the freehold to the house, I would need the majority to agree to release that share/house from the freehold - given the refusal to add a mortgage protection clause, I'm presuming that would also be a no. 

The reason given for rejecting the mortgagee protection clause was that it would open up the door for legal issues with other lessees wanting their lease to match. I don't know if this is true. To buy the property on the assumption they're going to have to rectify the issue collectively at some stage seems a risk. A number of the houses are let out and if not all parties are interested in the legal costs associated with the process I'm guessing it won't get the collective buy in from the freeholders.

I don't get the impression the beneficiaries are involved or bothered about the transaction at all and therefore not likely to put pressure on the freeholder/s to reverse their decision. 

eddddy

BigCoffeeMonster said:

This in effect means if I still want to buy the freehold to the house, I would need the majority to agree to release that share/house from the freehold ...

That's not really correct.

The Leasehold Reform Act 1967 gives the owners of leasehold houses the right to "compulsorily purchase" their freeholds. The existing owner(s) of the freehold cannot stop them (as long as a few criteria are met).

BigCoffeeMonster said:

The reason given for rejecting the mortgagee protection clause was that it would open up the door for legal issues with other lessees wanting their lease to match.

 
Obviously other lessees would want their leases changed - because they want their properties to be mortgageable.

And if they changed all 30 at once, they would probably get a 'bulk deal price' from their solicitor - making it cheaper for each leaseholder.


But the issue could be that all leaseholders must change their leases at the same time (because of the way the leases are worded) - but maybe only 20 or 25 or 29 of the 30 leaseholders have agreed to the change.

BigCoffeeMonster

Yes, that was my understanding too with buying the freehold. My solicitor said the complication comes from the fact I would have a share in the freehold/'company that owns the freehold' which is what would then make buying the freehold to an individual property difficult.

I also felt the same about all lessees wanting their leases changed in order top hold the value of their properties. I figured it would be worth buying the place and letting that sort itself out, but again I'm told it only takes a few people to refuse and the whole process becomes complicated and messy. 

eddddy

BigCoffeeMonster said:

Yes, that was my understanding too with buying the freehold. My solicitor said the complication comes from the fact I would have a share in the freehold/'company that owns the freehold' which is what would then make buying the freehold to an individual property difficult.

OK - if your solicitor sees a problem, maybe there is one.

But is your solicitor a conveyancing solicitor?  Often conveyancing solicitors have limited understanding of Landlord and Tenant legislation, including Freehold enfranchisement (i.e. buying your freehold)

I've come across a few examples of conveyancing solicitors messing up this kind of stuff.

(And rather than admitting they don't understand stuff very well, solicitors sometimes just advise you not to do something - so they don't expose their ignorance.)



BUT... in this case, there's a bigger logistical problem...

• Your lender won't offer a mortgage until the MPC issue is resolved

• You could resolve it by buying the freehold

• But you can't buy the freehold, until after you've bought the leasehold - and the lender won't offer you a mortgage to buy the leasehold

BigCoffeeMonster

Thanks eddddy, appreciate your thoughts and observations here. 

In fairness, my solicitor has openly said they have limited experience with freehold enfranchisement. But they have said the way the freehold is setup it's likely to be very difficult to buy the freehold to the individual property. I haven't had that confirmed by anyone else, but I do trust what she's said based on her thoroughness with everything so far.

Also, she hasn't advised against buying the property, but she did say that in the absence of an MPC, there's a real risk the property could be hard to sell and this could impact the value later on. The property is a cash purchase so I'm ok to go ahead - it's just a case of trying to understand if the risk is such that the MPC becomes non-negotiable. 

k12479

If there's 30 houses as the freehold, then are there some common areas, roads, etc. that also form part of it?

If so, extracting the freehold of individual properties from that may be rather involved as an alternative structure would likely need to be set up.

m0bov

It's very odd, the mortgage protection requirement should come from the lender. The lease shouldn't mention anything to do with the funding or risks of a mortgage. If the mortgage holder defaults, it goes to the bank. Very odd 

BigCoffeeMonster

k12479 said:

If there's 30 houses as the freehold, then are there some common areas, roads, etc. that also form part of it?

If so, extracting the freehold of individual properties from that may be rather involved as an alternative structure would likely need to be set up.

Yes there are common areas like small roads, pathways and garages. Thanks, that may explain the shared freehold. 

BigCoffeeMonster

m0bov said:

It's very odd, the mortgage protection requirement should come from the lender. The lease shouldn't mention anything to do with the funding or risks of a mortgage. If the mortgage holder defaults, it goes to the bank. Very odd 

My solicitor has said that a future lender is likely to require the protection as and when I come to sell. The current lease is such that any breach, the property returns to the freeholder/s without giving the lender warning or opportunity to rectify any breach. I'm not sure how true it is, but I'm told lenders are now becoming more aware of leases without these protection clauses and are requiring a deed of variation - which is what the freeholder has refused.