1st October 2017
Walker Morris’ Banking Litigation team frequently advises on the ever-present threat to lenders of forfeiture/loss of leasehold security. The team also increasingly handles cases involving breaches of mortgage conditions other than mortgage arrears, as a ground for recovering possession. These two seemingly quite separate trends have, together, resulted in some exciting new options for lenders. Walker Morris’ Head of Banking Litigation specialist explains his innovative advice.
Diversity in Low Cost Home Ownership (or, Immediate Market) options, coupled with economic pressures facing borrowers of all ages and across all socio-economic groups today, is resulting in mortgages increasingly being offered on leasehold flats, retirement housing, shared-ownership arrangements and so on.
In addition, while leasehold has traditionally been the appropriate form of land ownership for properties within communal buildings and estates, a recent trend has emerged over for housebuilders to sell new-build houses as leasehold properties.
Earlier this year the BBC announced that: “Almost half of all newly built properties in the UK are sold as leasehold rather than freehold properties. Some homeowners have found they are then tied into paying a ground rent that increases every year.” The reason for this is commercially motivated. Housebuilders sell the leasehold title to the house owner and then make a further financial return by selling the freehold title to a third party – often a profit-making entity owning a number of such properties. One MP has described this practice as the “PPI of the property sector”.
All of this means that lenders are increasingly finding themselves having to grapple with issues affecting their leasehold securities. These difficulties apply to both shared ownership and conventional long leasehold properties. Where a tenant defaults on paying monies due under the lease (such as service charges and ground rent), the first a lender hears about this is often when the landlord takes steps to forfeit the lease.
Faced with a threat of forfeiture lenders can be on the ‘back foot’ and are frequently left in the position of paying such charges (including substantial legal fees to the landlord’s lawyers), so as to ensure that the lease, and therefore the lender’s security, is not lost. This can be before proceedings are issued, or as a condition of applying for relief against forfeiture. The lender then generally debits such payments to the mortgage account in accordance with its Mortgage Terms and Conditions.
However, this approach creates multiple risks for the lender:
Another key issue for lenders is that payment of customers’ outstanding lease sums can (albeit somewhat paradoxically) lead to serious customer relationship issues. Through our own research we have discovered that, in the last three years, numerous customer complaints have been upheld by the Financial Ombudsman Service following the payment by lenders of ground rent and service charges on behalf of their customers. For example:
In any event, whenever a complaint is made – and whatever the outcome – significant management time and costs are wasted, and customer relationships and lenders’ reputations are adversely affected.
Currently, in many cases a lender’s options when faced with a potential lease forfeiture will depend on the approach taken by the particular landlord.
However, there may be an alternative option for lenders, which could preclude action by landlords in any event. This involves lenders pursuing possession themselves, but on the basis of breach of mortgage conditions, as opposed to on the basis of mortgage arrears.
In the majority of cases, the mortgage lender receives a payment demand from the landlord and the lender then makes payment so that its security is not left vulnerable to forfeiture or possession. The lender then adds any such payments to the mortgage debt. In due course the mortgage account might fall into arrears as the customer’s repeated failure to pay sums due under the lease masks wider affordability issues. The lender will then pursue possession proceedings on the basis of mortgage arrears.
A suspended order is very often likely to be made because reliance on mortgage arrears engages the court’s discretion under section 36 of the Administration of Justice Act 1970 to adjourn proceedings; stay or suspend execution; or postpone the date for possession, where the court considers that the customer is likely to be able within a reasonable period of time to pay any sums due under the mortgage.
However, in many cases where a lender has been asked to make payments under a lease where forfeiture is threatened (or where a shared ownership Housing Association is threatening to commence possession proceedings), lenders may be better served by following an alternative course. This involves lenders seeking possession on the basis of breach of mortgage condition (the breach being the customer’s failure to comply with the terms of its lease), rather than/or in conjunction with, action on the basis of mortgage arrears.
It is likely that, on the facts of many of these cases, a lender should be able to prove that its security is at risk and that it should thereby be entitled to an outright possession order. In addition, if a borrower cannot put forward reasonable proposals to remedy the breach of mortgage condition, then the section 36 discretion to suspend a possession order will be excluded in any event.
Walker Morris’ Banking Litigation team already acts for a number of retail lenders who have adopted an enforcement policy which involves seeking possession of leasehold properties on the basis of repeated breach of mortgage conditions where the customer fails to meet their leasehold obligations.
These lenders have taken this ‘alternative approach’ in over 150 cases in which the security was at risk due to lease non-compliance. In around half of those cases lease arrears were cleared by the customer. That not only resolved the immediate security risk, but also ensured that the customer fully understood, and took responsibility for, their liability to make lease sum payments going forwards.
The remaining cases were resolved through via the threat and/or issue of mortgage possession proceedings and the vast majority of those resulted in an outright possession order for the lender.
As well as the high rate of outright possession orders, this approach by lenders has been a “wake up call” for customers resulting in them properly addressing lease and mortgage compliance, and affordability issues generally, where they may previously have been unwilling to do so. As well as resolving the security risk for the lenders, this has enabled customers to continue living in their homes.
If you would like to find out more about Walker Morris’ alternative approach to resolving lease forfeiture/loss of security issues, please do not hesitate to contact a member of the team, who will be very happy to help.