The Law Gazette, recently (5 May 2017) reported that Nationwide has decided to protect homeowners from unfair leasehold practices by developers and landlords.
Under a new policy for newbuild leasehold properties, on all new mortgage applications received from 11 May the minimum acceptable lease term will be 125 years for flats and 250 years for houses. (Currently in many cases the lease term is 99 years only).
While this may have an upward effect on the price for new build properties, the buyers will have the comfort that they do not have to spend on a lease extension at least for the next 25 years. Further, if other lenders also follow suit, the developers will be forced to be realistic in their pricing of new build properties. They would not be able to substantially increase price because of the extended term requirement, or they will be pricing out a substantial section of potential buyers.
For Nationwide, the maximum acceptable starting ground rent will be limited to 0.1% of the property’s value. They insist that the ground rent must be reasonable at all times during the lease term. Unreasonable multipliers such as doubling every five, 10 or 15 years is not allowed. Increases should instead be linked to a verified index, such as the retail price index.
If the valuer believes the property’s marketability will be severely affected by unreasonable lease terms, they may decline the property or reflect those terms in the valuation figure they provide to the lender.
This is an area that has often been left unnoticed by many conveyancers during the initial grant of lease, resulting in unaffordable ground rent over time, seriously affecting the marketability of the property in future.
A few weeks ago The Construction Enquirer reported that Taylor Wimpey is setting aside £130m to compensate home buyers locked into unfair leasehold contracts. The leases of properties sold between 2007 and 2011 prompted a storm of complaints after homeowners realised their ground rent charges could double every ten years.
We at Hubbard Pegman and Whitney LLP were conscious of this issue for some time and it is one of the reasons we decided to stop acting for developer referred new build leases. The developers generally create a standard lease heavily in their / landlord’s favour and refuse to amend the documents on the ground that it is the standard one they use for all buyers. We have on a number of occasions, raised certain issues that adversely affected buyers and managed to get amendments, although when it comes to ground rent and service charge issues, developers do not budge on individual cases. Hence the decision of Natiowide, and hopefully other lenders in future, to stand up for the buyers is hugely welcome.
We have also advised our clients regularly against accepting doubling ground rents even every 25 years and have successfully negotiated with landlords against such increases during amicable lease extension process.
It is important for buyers and conveyancers not to lose sight of the long term effects and impact of such lease terms in pursuit of quick completion of the transaction at the minimum cost, because the long term impact could potentially be damaging.
If you have any concerns on your existing or proposed Leases or would like to consult on such matters, please contact our conveyancing department.
Peter is a Conveyancing Solicitor at Hubbard Pegman and Whitney LLP. Peter brings in over 20 years of legal experience in two jurisdictions. He also has considerable experience of property development and management in UK which enables him to advise clients on and deal with complicated property transactions. Hubbard Pegman & Whitney are able to act for all types of property transactions in England and Wales, both residential and commercial.