A topic that appears to be giving some lenders a major headache is the issue of an applicant owning a leasehold title of a property and also owning (all or in part) the freehold title too – this also extends to close family members.
The ownership of the two titles does not need to be in exactly the same names but the fact that the client has an interest in both titles can be a problem. In this regard, the position of the lenders can vary significantly.
BM Solutions has had some concerns in this area before, so it will include an extra level of protection, by taking a charge over the freehold of a property, as well as the leasehold title. A reasonable and sensible solution.
Foundation is firmly in the camp that if a client has an interest in both leasehold and freehold titles, it will not lend.
Keystone applications where a client owns both leasehold and freehold is currently raising additional queries and considered outside criteria.
Why is it causing some lenders an issue?
Well, the root cause has been with us for many years – Restrictions are laid out in the Commonhold and Leasehold Reform Act 2002, in particular the forfeiture of a residential long lease.
The 2002 Act is an extensive document, so a very simply explanation - if the owner of a leasehold title does not pay the freeholder of the property such items as ground rent and service charges, then under certain circumstances the leaseholder could be considered in breach of their lease. If subsequent legal proceedings find in the freeholders favour, the leasehold title could be forfeit.
Admittedly the 2002 Act is geared towards protecting the leaseholder and the legal process provides opportunities for the leaseholder to correct the situation and avoid forfeiture of the lease. Therefore, where a leaseholder and freeholder are unrelated, a lender would not generally be concerned as the law has been improved to include additional hoops for the freeholder to jump through.
However, if the client owns both the leasehold and freehold titles in same / different legal names, they could potentially manipulate the system to forfeit the lease, passing ownership to themselves as freeholder. This is what lenders are afraid of - being left high and dry, without any security or right of recourse against the borrower.
In practice, the number of occasions on which forfeiture of a lease has occurred has so far been extremely rare. However, lenders always have a mind to the “worst case scenario” and whilst the chances of it occurring are minimal, some credit functions may take a more cautious approach than others.
Unfortunately, I’m aware of one lender that has suffered from this, albeit that the relationship between the leaseholder and freeholder was an “emotional” one.
Scenario: Husband owns a leasehold flat, which they will lend on. Wife owns the freehold of the same building. The couple divorce, which I suspect was acrimonious, and the wife successfully proves her husband did not pay the ground rent or service charges for the flat. This resulted in the lease being forfeited and the flat passing to the wife. Cost to the lender for the lost security. The lender clearly doesn’t want a repeat of this scenario.
From a Keystone perspective, we are working hard to get a workable solution and ensure that the brand's ability to lend is not diminished or restricted.
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1st February 2017