Buy to let lending policy on freehold and leasehold ownership

Chris Longhurst, consultant mortgage broker at Mortgages for Business explains why lenders have started to review their stance on landlords who have an interest in both the leasehold and freehold of a property.

If you own a flat within a block it is likely that you own it on a leasehold basis. In basic terms this means you own the right to occupy the flat, but you do not own the building it is in – you are leasing it from the freeholder. If you own the freehold of the building you own the entire building and the land it stands on outright.

The leasehold and freehold should never be owned in the same name, although in many cases our clients have some kind of share in both. Typical ownership structures for these cases are shown below:

If you own the freehold in a…

You could own the leasehold in a…

Joint name

Sole name

Sole name

Joint name

SPV/Ltd Co name

Sole or joint name

Sole or joint name

SPV/Ltd Co name

 

If you own the freehold as…

You could own the leasehold as…

Mr and Mrs Barrett

Mr Barrett

Mr Barrett

Mr and Mrs Barrett

Barrett Ltd

Mr and Mrs Barrett

Mr and Mrs Barrett

Barrett Ltd

 

In the good old days it was fine for investors to own a leasehold flat and also be involved in the freehold of the building. Refinancing this type of buy to let was never an issue – yes some lenders may have had exposure issues and would only be prepared to fund one or two of them, but there were plenty of borrowing options available.

Over the last few months we have become acutely aware that a good number of buy to let lenders have started to review their criteria and will no longer accept a long leasehold as security where the leaseholder also has a significant or controlling stake in the freehold.

Why? Here’s an example to demonstrate:

Mr & Mrs Barrett

With the help of a buy to let mortgage, Mrs Barrett owns the leasehold of a flat which is rented to tenants.

Mr Barrett’s limited company, Barrett Ltd, solely owns the freehold of the building in which Mrs Barrett’s flat is located.

Mr & Mrs Barrett have an acrimonious split.

Mrs Barrett refuses to continue paying the mortgage on the leasehold flat which subsequently defaults the loan. She also stops paying the ground rent and service charge due under the terms of the lease.

The mortgage lender attempts to call in the security (the leasehold flat) but is thwarted by the freeholder, Barrett Ltd.

Barrett Ltd, claims that non-payment of the ground rent and service charge are defaults under the terms of the lease. In real terms this means that Barrett Ltd could go to court to claim forfeiture of the lease, which takes preference over the mortgage lender who is left with an unenforceable security.

What is an unenforceable security?

As the lease has been forfeited, technically it no longer exists, so the lender no longer has a charge over the flat or the right to repossess it which could result in the lender being unable to recoup the loan.

Being an over-cautious bunch most lenders are no longer willing to take a risk involving a husband and wife team (or other type of partnership).

We have contacted a number of the buy to let lenders and as I write there appears to be no definitive answer to this conundrum. Several lenders have just said ‘no’ and intend to remain firmly in that camp. Others are in discussions with their lawyers and we await further news.

Some lenders have a workaround to this scenario

Fortunately we have access to a selection of more pragmatic lenders that will still lend against the long leasehold but also choose to take an equitable charge over the freehold….just in case.

Watch out for further developments. I’ll keep you updated.

In the meantime, if you are looking for finance and you have an interest in both the leasehold and freehold of a property, do get in touch to talk through the current options. I can be contacted directly on 01732 471607.

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