Defective Leases

There are many leases being bought and sold that are considered defective. Any and all types of defect should be rectified during the conveyancing process but the use of indemnity insurance to cover any and all defects have become second nature.

There are 3 categories that defective leases fall into as per the CML Handbook:

1. Leases which do conform to the  Guidelines;
2. Leases which do not conform to the Guidelines but where an indemnity policy will normally be acceptable to a mortgage lender;
3. Leases which do not conform to the Guidelines and where the defect is so serious that indemnity policies will not solve the problem.

LEASES WRITTEN BEFORE 2006

Leases written before 2006 are particularly prone to fall into the defective category because they won't reflect the number of legislative changes made to the leasehold sector since they were created. The language used in them is usually written in convuluted legalese with no puctuation, are often very long in length, but neverthelss require reading all the way through to find the relevant parts.

The main elements of leases written before this date usually fall into 6 categories:

1. Premises Demised by the Lease - This section of the lease identifies precisely the property being leased and should also contain a floor plan of the unit and include ownership of party walls.
2. The Rights Granted and Accepted - This section should include all rights and restrictions including rights of access to the building and its common partsn and the right to run services such as gas or electricity through the building into the flats;
3. Restrictions relating to Noise or Pets
4. Repairs, Alterations and Decorations - This section identifies whether it is the landlord or the leaseholder that is responsible for carrying out repairs, alterations and decorations.
5. Insurance - This section defines which party is responsible for insuring the building and describes the required extend of the insurance.
6. 5a and b) Ground Rent and Service Charge - This information is usually located in two separate sections of the lease and both are paid by the leaseholder.

ALTERATIONS DEFECTS

Most leases require consent from the freeholder in order to carry out any alterations/repairs in the form of a Deed of Variation (also known as a Licence for Alteration) which then becomes part of the title deeds.
However, there are no statutory guidelines on what the freeholder can charge for granting such consent so whilst at the time this may not be considered important, when it comes to selling the property and permission has never been granted, then the lease has automatically been rendered defective.

Correcting it in order to make it saleable often runs into hundreds of pounds in legal fees, with a timeframe of several weeks. This has led to buyers getting the freeholder to agree to a retroactive Deed of Variation approving any risk and which they pay for in order to either prevent the sale to from being be delayed for months or fall through entirely.

BUILDINGS INSURANCE DEFECTS

Whilst some leases only enable flats to be insured separately, this is considered to be a lease defect because individual policies do not cover the structure, common areas and any other communal facilities.

Having said that, insurers are still offering individual policies for each individual flat. This is known as dual insurance and occurs when a purchaser is sold an individual policy that is not required when the building is insured on the one block policy, something that will have been clarified before the mortgage was finalised. When this is later discovered, leaseholders will not be able to get a refund from the freeholder because the covenant to insure has been adhered to. It may also prove somewhat difficult to get a refund from the broker for the separate policy.

Unless the lease clearly states that individual insurance is required, then the only other insurance that needs to be considered is that of contents.

SERVICE CHARGE COLLECTION DEFECTS

Any of the following omissions in the lease surrounding service charge provision will render it defective and should immediately be reported to the lender:

1. No collection dates;
2. No incentive for arrears to be paid up quickly. When service charges are the only form of funding then obviously the arrears increase and works cannot be carried out as required. It's also extremely unfair to those that pay their service charges on time;
3. No provision for advance maintenance contributions. When service charges are only equal to the amount of ground rent being collected funds will soon be exhausted;
4. Flats not limited to pay for what they reasonably use. For example, a flat on the ground floor might have to pay for maintenance and repairs of a lift they never use. Likewise leaseholders with flats with private front doors may find themselves having to pay towards redecoration of the communal entrance.
5. Managing agent fees not allowed to come under service charge expenditure;
6. No provisions for a reserve/sinking fund which a) evens out normal day to day expenditure and b) covers large areas of expected (or unexpected) expenditure that comes as the building ages.

TITLE DEFECTS

The main difference between registered and unregistered title concerns what is known as defective title. If the title is defective, the lender must be made aware of this and the title certified accordingly. Where a defective title insurance is needed resulting from a defect in the property, such as a missing deed or lack of title to the property, the seller will be expected to obtain and pay for the policy. Naturally this will not always be agreeable to the seller, particularly where the seller and the conveyancing solicitor differ in their view of the alleged defect. however, where insurance is required to cover the absence of an official local search for example, and the urgency to exchange is coming from the purchaser, the buyer should expect to pay for his own indemnity insurance. Sometimes the cost is split between the buyer and seller.

SUMMARY

The use of indemnity insurances rather then resolving the actual problem during the conveyancing process has unfortunately creating a market where retroactive consent has had to be sought and where landlords can (and do) regularly demand hugely inflated sums for granting it. In turn it allows them to negotiate higher asking prices for the freehold when leaseholders want to collectively enfranchise, i.e. buy the freehold themselves.

Even though newer registered leases written after 2006 have been re-worded to require them to have a set of prescribed details at the start, they can still become defective because requirements of lenders and other parties can change.