Property lawyers in England and Wales are sitting on a potential time-bomb as one and a half million leaseholders face an increased risk of their property plummeting in value, or even becoming unmortgageable.
What has changed?
A number of lenders have recently increased their minimum unexpired lease term requirements to 85 years. The consequences of failing to warn clients about lenders’ trends and the dangers of having a lease of less than 85 years are potentially very serious. Many leasehold owners with less than 85 years remaining may find it nigh on impossible to sell on. Changes in lender attitude to leasehold properties and in particular amendments to section 5.14.1 of the Council of Mortgage Lenders (CML) handbook may well trigger a wave of negligence claims between in the next few years.
In the last six months of 2015, 17 lenders - more than 12% of all mainstream lenders - amended their minimum lease term requirements upwards. Ten lenders made a change from 70 to 85 years. The landscape has changed dramatically in just a few years. Back in 2010, half of the lenders who now demand 75 years, accepted leases with just 55 years remaining. Lexsure projections, based on detailed trend analysis, predict that by 2025 the majority of lenders will not lend on a property with a lease of less than 85 years remaining.
Typical leasehold conveyancing transaction example:
Summer 2016: Your client completes on a flat with 87 years left on the lease. You express no concerns regarding the unexpired lease term. The Report on Title is silent about extending the lease term as even the marriage value is not a consideration at this point.
Summer 2019: Your client now looks to sell his property. Because many (or by then perhaps most) lenders will not lend on a lease term of less than 85 years, the buyer finds he cannot find a mortgage and threatens to withdraw from the purchase. Your client is under pressure to extend the lease before exchange. The cost is reasonable because there are more than 80 years remaining, but the legal costs and premium will come to about £4,000. Where does he find the money from? Time is short and the negotiation is protracted, as the freeholder realises that your client is prepared to pay more for an early resolution. Your client is shocked that this was an issue and questions why you did not raise it when he purchased the property.
Putting things in perspective
In order for a claim to be successful against the conveyancing lawyer the loss has to be ‘reasonably foreseeable’. Is it reasonable to expect a lawyer to pick up on the trend of lenders increasing their minimum unexpired lease term? Can a lawyer really be expected to appreciate the marketability of property? Time will clearly tell as to whether we will see a flood of claims ….but what is the downside to adjusting your Report on Title to address this potential issue?
One thing I do know for certain is that in the last few months Lexsure has received a significant increase in the number of enquiries received from members of the public and litigation firms asking for details of specific lenders requirements such as minimum lease term a few years earlier but also an overview as to the lending industry's approach generally on a given date.