Mortgagee protection clauses – what’s the big fuss
In a leasehold property many of you will know that you do not own the land, and sometimes building, that your property sits within. Instead this is owned by a freeholder, commonly called your landlord. In order to maintain the exterior of your property and carry out necessary services to any communal areas and grounds the Landlord collects a service charge from you. The landlord also, in most situations, collects a ground rent from you which is a fee paid to the landlord simply by virtue of owning a property on their land. Whilst ground rents are being phased out the new rules only apply to very new leases and many current leases will still have these ground rent payments in the usual way.
In order to secure payment of this rent the lease (which is the key document containing all the terms of owning your property) will contain a forfeiture clause. This is a clause that allows for the property to be taken back and the lease determined, by the landlord, if you were to default on your ground rent payments (which is why it is very important to keep up with your payments even if they are a small amount!).
When you come to buy or sell a leasehold property the buyer’s solicitor will usually look to see if there is what’s called a Mortgagee Protection Clause (MPC) within the lease. This gives a mortgage lender (where applicable) notice that the property owner is in breach of the terms of the lease by not paying the ground rent and therefore the landlord intends to start forfeiture proceedings. The lender would then be given the opportunity to remedy the breach in order to stop forfeiture of the lease.
As you can imagine any lender would be very concerned about the idea of mortgaging a property with a buyer and then losing the property as security to the landlord through no fault of their own!
Lenders therefore often insist on a mortgagee protection clause in leasehold property as a matter of course. As legal representative for the lender on a purchase, it is a solicitor’s job to also ensure the lender is protected from this risk in accordance with their overall general instructions. Whilst forfeiture is actually quite a lengthy and unlikely process in practice it is not impossible. Lenders would rather avoid the risk entirely by ensuring the lease has a mortgagee protection clause than deal with the issue of forfeiture if it were to arise in future. A more of a proactive rather than reactive approach.
It can often be a matter to deal with on leasehold properties and can delay a transaction should a clause need to be added to the lease or a report to the lender for their instructions need to be made. Buyer’s without mortgages will also want to consider whether this may affect their saleability of the leasehold property in future.
Capron and Helliwell have a wealth of experience in dealing with leasehold properties and are experienced in spotting this issue early on and should you be buying or selling a leasehold property (or any property for that matter) please do not hesitate to get in touch with us for a no obligation estimate.
For further information or if you are considering buying or selling a residential leasehold property please contact Christina Hartley-Hengist on 01692 58123 or
c.hartley-hengist@capronandhelliwell.co.uk